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The following is a guest post by Ty Danco. Ty is an angel investor and startup mentor. Read more of his thoughts at tydanco.com.

You’ve got a killer idea, a good prototype, a terrific market opportunity, and maybe even some funding already. But you still may lose potential investors that have nothing to do with your deal, and everything to do with you. Here are 5 of my non-negotiable hot buttons that will make me turn down an investment, no matter how good the financial prospects appear.

1. You knowingly mislead people. If you’re not trustworthy, it’s over. Full stop. It can be as simple as pretending to know answers when you don’t, implying that you have investors or contracts that aren’t real, or giving half answers to questions that conveniently leave out non-flattering but significant information. Note that I’m not going to dump you simply for painting the rosiest plausible picture and showing hockey stick revenue numbers that seem ridiculously ambitious. Investors expect some amount of hype, and we can put up with that. But you have to be honest.

Worst is a coverup: An entrepreneur presenting to an angel group was discussing his record as a "successful repeat entrepreneur", but didn’t give particulars other than "the last company he founded went IPO." When upon questioning he told us the name of that company, it only took a few minutes on Google to discover that 1) the company was now defunct, having been in the middle of a penny-stock trading scam, with multiple lawsuits still ongoing; and 2) that the founder/CEO had a different name than the man presenting. He responded to the first fact that he had been the victim of those scams, and to the second that he had decided to change his name. Needless to say, no checks were written to that company. His new company actually had acquired rights to some interesting technology, but the integrity question made it a total no-brainer pass.

2. You haven’t done your homework. Unfortunately it’s not the norm that an angel will have deep knowledge of the sector you are in, so we’re going to ask questions, and lots of them. But imagine what our reaction will be if you don’t know the answers to our basic questions about your own markets, your competitors, or worse, haven’t even considered an obvious question. At best you’re too green to invest in, shown by your chase of angel investments before you are ready. The good news is that this is easily correctible. Do your homework before you pitch angels; when you practice your pitch dozens of times before mentors and other entrepreneurs, chances are you will have had a chance to think about and respond to almost all of the obvious questions. But until you get to that point, don’t burn your bridges pitching to investors too early. Work on your business model and your pitch until they are shining jewels.

3. Your projected expenses are unreasonable. As mentioned above, I don’t really mind—and come to expect—entrepreneurs showing revenue projections that go straight to the moon. However, I will scrutinize projected expenses, hard. If they are unreasonably low—for instance, having a model that depends on external sales without any meaningful salaries or commissions, not budgeting in legal expenses, etc.--that marks you as a greenhorn that needs to go back to school. Worse than the greenhorn is the greedy entrepreneur who is looking to raise money to immediately go back into his or her pocket. This is especially true when the entrepreneur has been on the beach, or an "independent consultant" for a period of time. It’s no sin to need or get a paycheck, but if you are looking to angels to fund your six-figure package, that’s a telltale sign of greed. Down the road, a me-first priority will manifest itself in losing employees, creating lousy margins, and other bad scenarios. The CEO needs to take the lead in all aspects—including demonstrated hunger, commitment, and sacrifice. If you’re focused on the short-term rewards, there won’t be any long-term rewards around for us investors.

4.You don’t follow through. This is another "tell", as poker players say. This won’t be evident at a first meeting, but in the follow-up. Dharmesh and many other angels are correct in saying that diligence can be quick, given that startups will change directions. I too believe due diligence needn’t take more than a week or two, but I still think that in most cases there needs to be several interactions between entrepreneur and potential investors. Why? With the biggest risk for startups being execution risk, we need to assess whether you will do what you say you’ll do. If you call us when you say you will, if you follow-up on our questions quickly and efficiently, those are all positive indicators that you are accountable and will deliver on promises. There’s no shame in putting a reasonable but later date on some deliverable because you’re busy—I hope and want you to be busy, and maybe even you’ll earn bonus points if you turn something around earlier than promised.

5. You’re dogmatic. It’s easy to say no to someone who is a jerk. But assuming that you’re not arrogant, full of yourself, and "getting high on your own supply", you can still turn us off by not considering alternative viewpoints. When you answer questions before we finish asking them, when you don’t take the time to really listen to what people are talking about, when you assume you know every answer cold even before it’s clear where a comment is coming from, that’s another telltale sign of too much hubris and not enough coachability. There are plenty of people who are uncompromising—Steve Jobs is just one example—but Steve Jobs are few and far between, and I’m willing to bet that he listens before he rules.

This is not to say that the investor is going to be right or that you are wrong. I especially like it when an entrepreneur has considered an option I just proposed and educates me why they have decided not to go down that route…as long as they have taken the time to listen. But an absolute black and white dogmatic approach that leaves an impression of "my way or the highway" raises the likelihood of an inflexibility that will most likely doom your company. Pivots happen…and you have to be open-minded along the way as you build your company.

For a good entrepreneur, it shouldn’t be hard to avoid these potholes: you do your homework, you don’t lie, you follow through, you’re not short-sightedly greedy, and you’re open to hear what others think about your strategy and prospects. Miss any of those, and you become a bad bet—low odds that can’t be papered over by any amount of experience, social proof, traction or the other building blocks that attract an angel’s attention. When our due diligence shows that you’re not going to let us down in those five areas—now you’re a whole lot closer to being bankable.

What do you think? What else should entrepreneurs keep in mind to keep angels from walking from their deal?

The following started out as a late night email I was going to write to someone that reached out for some guidance and advice. Expanded version posted here in a somewhat desperate attempt at garnering sympathy and understanding. Thanks for your patience. -Dharmesh

Dear Friend,

Thanks for reaching out and connecting.

It is likely that you, your idea, your company, or your proposition is awesome. Unfortunately, my schedule is totally not awesome.

One of my biggest weaknesses in life is that I too often say yes. I'm passionate about startups. I get excited about new ideas. I love making new friends online. And, it's so much easier to say yes than it is to say no. “Yes” is more fun and carries less guilt (in the short term).

However, I've learned the lesson that every time that I say yes to something new, I am effectively saying no to something else. And, I've already said yes to too many things, and so have to say “no” to you. No, I can't accept a request for a call, a meeting or some time to review your startup or your business opportunity. Embarrassingly, I'm unlikely to be able to respond to your email (though I do read just about all of them).

Although my heart says yes, I need to say no.

I know you feel like you're asking for so little (“I just need 15 minutes for a quick call…”), and you are. But, there are just not enough hours in the day, or days in the week (I work all 7) to review or respond to all those that reach out. I confess that I am overwhelmed. My sincere apologies. I wish I could bend the laws of space and time, but unfortunately, my past efforts at doing this have proven futile.

Here's a bit more detail on my professional priorities:

My #1 priority, by a long shot, is my company, HubSpot. I am emotionally, financially and morally committed to HubSpot. I want HubSpot to be successful. By my definition, success is making those who believed in you look brilliant. So, I work very hard to make HubSpot customers, employees and investors look brilliant. If you have your own startup, I think you can likely appreciate what an all-consuming activity it is. There is precious little time for anything else.

What little time there is left, I mostly spend on OnStartups.com. I write blog articles. I do some tweeting. I do some public speaking. I make some angel investments. The way I choose how I spend this time is very simple: I'm looking for leverage. I'm looking to positively impact the most number of people with the limited time/energy I have available. This is why, although I have invested in over 20 great startups as an angel investor — I spend very little time with any of them individually (I make this clear before I invest).

And, as it turns out, I have a bit of a personal life too (though some might argue that point). So, when I'm not “working” (I use the term loosely), I like to spend it with my wife Kirsten, and my new baby boy, Sohan.

To prevent this entire article from being a self-indulgent pile of poo, I'd like to share some useful resources.

Some Useful Links and Information

1. If you're raising angel money for an early-stage startup, I highly recommend AngelList. It's an easy, efficient way to get in front of some great angel investors. There's nothing like it anywhere else. I do many of my angel investments through there now.

2. Already in negotiations with investors? Have a term sheet? You MUST read Venture Hacks. A super-practical guide to some of the ins and outs of what you should look out for. (Interestingly, Venture Hacks and AngelList are run by the same two awesome guys: Naval and Nivi).

3. If you have a specific question about startups, try posting to http://answers.onstartups.com — Powered by the StackExchange platform (same software that runs the fantastic Stack Overflow). Nothing gets my attention more than if you build authority and credibility there. (Because I like to help folks that like to help others). And, there are a bunch of cool people that jump in and answer questions (including Joel Spolsky himself).

4. If you're a super-awesome developer (and I mean really, really awesome) and looking to join a startup that is equally awesome, you can proceed directly to GO, and just reach out to me via email. I can connect you to HubSpot, or one of 20+ startups that I am invested in who are almost all looking for great people.

Finally, I want to close with a hat-tip to folks like Dave McClure, Chris Brogan, Andrew Warner and others that work so freakin' hard and despite their celebrity status and crazy schedules, manage to make time in their busy schedules to help a bunch of people. They succeed where I fail. I am humbled.

Wish you the best in all of your efforts. Thanks for your support and understanding.

The following is a guest post by Yoav Shapira one of the early team at HubSpot and VP Platform.

Earlier this week, HubSpot unveiled its "App Marketplace," an area for customers and prospects to install "apps" much like Apple’s App Store or Salesforce.com’s AppExchange.

Why would we do this? Doesn’t the world have enough App Stores already? Does an app store really make sense in the world of business to business? This article describes our early considerations on this topic, what we did, and why we did it. We’re probably wrong on some of these things, and we’d love to hear your feedback in the comments.

We hope some of these thoughts help you structure your own analysis for your own business.

What’s the story behind the HubSpot App Marketplace?

Our App Marketplace started out as an area to test new features and portions of the product which were not ready for regular customer use. We called it “Labs”. We modeled the implementation on what Google has done (specifically, Gmail). In Gmail, you can go to the “Labs” area in settings and enable a large number of additional features. We implemented this “Labs In The Product” at HubSpot for the same reasons that Google did. It’s a great way to get new features out to a self-selected list of users, measure results and iterate quickly.

Customers were very positive about this approach. It was clear which parts of the system were still new and in “beta”. As our functionality evolved, we recognized that these cool new “Labs” features didn’t have to just come from us. Third party developers could also build nifty new capabilities that would help HubSpot users. Also, as it turns out, people are quite used to the notion of an “app store” (thanks Apple!), so we shifted our efforts into what is now the HubSpot App Marketplace.

Why not have another Beta approach, like sending some portion of our traffic or customers to Beta versions of the software?

We like this approach. We’ve been doing it for years, and we continue to do so.

What the App Marketplace brings to the table, besides the familiar metaphor for customers, is that it puts the customer in control. They decide if and when to install an app, and can remove it at their leisure. So it’s not quite a controlled A/B test, but it’s much more optimized for the customers themselves. We like that. We also like that instead of us choosing some random sample to test out a new feature, we can get data on which of our customers are interested in which kinds of capabilities.

But don’t you need many developers building stuff for a successful app store?

As it turns out, no, you don’t ;) Especially while we were thinking of the app marketplace as a “Beta” channel, we planned to simply have our in-house developers create some apps. In fact, this is how the first couple of marketplace apps evolved.

Our app marketplace model is a mixture of both quantity and quality. It’s not extreme on either end. We don’t want to be like Apple, controlling the entire experience very tightly, because that is painful for developers. We also don’t plan to have millions of applications in there, as a B2B company, because our market is not quite big enough yet. More on that shortly.

What we found is that of our existing hundreds of partners and VARs (Value-Added Resellers), at least a couple dozen companies have developers and are happy to work with us. In fact, they see this as a channel to productize their custom integration work into something more profitable. For these organizations, the marketplace provides an opportunity to build an ongoing revenue stream.

We’ve been working closely, and happily, with these early partners. We’ve incorporated their feedback, and in turn, the ecosystem gets better for everyone involved.

We’d love to get more developers, and we have some ideas In this area, but we’re not shooting for millions. We’ve been pleasantly surprised at the amount of interest in our marketplace from developers, and we’re working with them closely. All the documentation and code samples are free / open-source, as is the discussion group, where everyone is welcome.

Alright, but surely these developers want millions of customers?

Thankfully, that’s not the case. Each of our partners does their own economic calculation, but it turns out for many of them, selling hundreds or thousands of customers, at up to a few thousand dollars per customer, is a very nice business.

It turns out the SaaS subscription model works nicely here as well. We’re not selling $0.99 apps, nor $0.99 add-ons. Apps like some CRM integration packages could easily cost tens of thousands of dollars, but end up costing a small portion of that amount in our marketplace, because the developer gets dozens of customers instead of one.

Isn’t this distracting from your core product work?

Yes, you should primarily focus on your product, and we do as well. The app marketplace is supported by less than 5% of our development team, so it’s not a big distraction. And it provides a channel that makes most of the rest of the team more efficient, at least when it comes to testing out Beta-type features or product ideas.

I get that. But doesn’t the world have enough app stores?

There are three reasons we did this, all driven by customer feedback.

First, it turns out that marketing involves many different activities. The number of tasks our customers have to do is very large, and we want to help them with the entire marketing process. This would take us a very long time to build ourselves and like all companies, we too have limited resources. The marketplace provides another way to help more of our customers, faster, whether we do the work or someone else does.

Second, customers are becoming more sophisticated over time, and they want to pick and choose among different modules or pieces of functionality. It’s not a simple “one size fits all” when it comes to small business marketing. We try to listen to our customers, so we’re giving them a choice. But rather than have a very complex pricing matrix, we just used a metaphor they know and like, thanks to Apple et al.

Third, our customers are aware of other external applications that are available . But they have told us they trust HubSpot more than a random web site they don’t know. They already pay us, they already know us, and even though we don’t write or support most of the apps in our marketplace, they still prefer this to a random 3rd party.

Those were some of our considerations. Stay tuned for another blog post coming soon, covering where we belong on the Apple / Google app store spectrum, how shipping a minimally-viable product totally worked (we haven’t built billing yet), and more…

Meanwhile, would to hear your thoughts on the pros and cons of trying to build a store/marketplace for your product. Do you think we moved too early at HubSpot? Should we simply have kept our platform development to exposing APIs and having "external" integrations -- instead of allowing applications to co-exist within our system? All thoughts and comments appreciated. We're learning as we go.

Really enjoyed the recent article on your personal blog, “Inflection Points: Bravery vs. Foolishness”. Very few entrepreneurs have the courage to be that transparent. On behalf of entrepreneurs everywhere, thank you!

We've known each other for many years now and have had many a late-night conversation, and many dinners. I'm honored to call you a friend.

Though our direct chats are always fun and useful, I thought it might be interesting to have a longer, “in written form” response to your article. I was inspired to write this article a bit by Brian Halligan, my co-founder at HubSpot (who you also know), who left an exceptionally detailed comment on your article. I'll be borrowing liberally from Brian's comment (it won't be the first time I've borrowed from Brian's wisdom and used it to make me look smarter than I actually am).

1. It's great to have options. Raising capital is always a bit of a scary thing for an entrepreneur. And, for right reason. It not only changes a lot about the business, it also changes you. SEOmoz is now at the stage where outside capital is not a “necessity”. That's awesome. It takes away one of my biggest concerns with raising capital: When the entrepreneur doesn't have a choice, she doesn't have any leverage. Having the option to raise capital is a big amount of leverage and dramatically increases the odds of both getting a fair deal and making a rational, thoughtful decision.

2. If you're going to raise, raise now. If you're thinking about raising capital, this is a really good time to do it. The markets are nice and frothy, making for a great time to be a seller of equity. The timing question is always hard (both in terms of M&A, which is selling all of your equity or a funding round, which is part of your equity). I've been through this particular calculus before. When things are going really well (as they are for SEOmoz), it's tempting to think: “Hey, the market is valuing us at X times revenue — our revenue is going to go up by Y, so our valuation will be going up by X*Y in the next year.” I've made exactly that argument to myself in the past (not at HubSpot, but my former company). As it turns out, up markets go down and frothy markets get less frothy. So, if the market took a downturn, it could have two potential impacts on your company valuation: 1) your revenue multiple goes down (thereby decreasing valuation). 2) Your actual revenue could be lower than you expected — because people are not buying as readily or cancelling more often. So, it's entirely possible that despite having a “good” year coming up, the company is valued less. So, our advice would be: If you're considering raising at all, don't try to wait until you drive your revenue up further. Raise now.

3. Take some freakin' money off the table! I recognize that you have concerns. And that you lead a modest and happy lifestyle. And that you don't want money to mess things up. I get all that. But, it's not only irrational to have such little diversification of your personal funds, it's outright irresponsible. In terms of how much you should take — that's a personal decision. If it were me (I don't have a particularly lavish life either), I'd shoot for several million. Enough to where you didn't have to worry (or think about) money at all for the next 10 years.

Bonus argument: Even if you kept your lifestyle exactly the same, here's one more phenomenal reason to take some cash off the table: You could become an angel investor and help other up-and-coming entrepreneurs get started. Trust me, you'd have a blast! Though this doesn't completely solve the “lack of diversification” problem (you'd still have your money tied up in startups), at least it's not all the same startup.

Oh, and by the way, I know you kids these days like living on the edge and all, but having just $25k in savings is unwise — especially if it's unnecessary.

It is not about the money. It's about having options.

Finally, as Brian said: Just because you have millions in the bank doesn't mean you have to stop working crazy, ungodly hours. My suspicion is that you have the startup gene that means you're going to work crazy hours regardless. (Besides, who wants to work godly hours, anyways?)

4. VC will definitely change things. I'll just take Brian's words directly on this one: My personal sense of the thing that will be most uncomfortable for you is if a good quality VC joins your board is the scrutiny she will give your team and other board members. She will constantly be testing your conviction about team members and constantly looking to hire one of her crony outside overpriced headhunters to replace the folks that you rely on and who built your business with you. I have no idea whether you think your team is the right team that will scale or not, but if you do think they are the right team that will scale, be prepared to defend that position for a long time. VCs can never know your business that deeply and chapter 1 of their playbook where they think they can add the most value is on the “team.” It is low risk for them and their network is where they perceive their biggest value is. Sometimes they are right here and bring in just the right person, other times they don’t.

5. Its about the people. Also from Brian: Your hierarchy of investor priorities is right. I have gotten to know a lot of VCs over the last few years and many of them are not as good as I expected. There are some of the really top dogs that I’m convinced are far more lucky than good, so don’t be dazzled by their investment record. In my mind, there are two “types” of VCs, ones that are more like Wall Street equity analysts that are great with spreadsheets and picking trends and others that are former CEOs. Like you, I’m a first-time CEO, so part of my criteria was to find the ex-CEO type who I could turn to for advice and this turned out to be a really good decisions for me. When an equity analyst type or an ex-CEO type, I’ll give you my VC test: When I meet with them to talk about the business, do I take any notes or any action items? About 80% of the time when meeting VCs, I don’t take any notes or any action items — once in a awhile I meet someone that is sharp and changes my thinking or gives me great advice. Go with one of those ones, even if the terms are much worse.

6. Protect the culture. One thing Brian and I have learned in building HubSpot is that culture counts. Industries change, markets change and products change — but amidst it all, great cultures endure. You've built a great culture at SEOmoz and you should fight to defend it. But, raising a round of capital doesn't necessarily mean you'll screw your culture up. I like to believe we do a pretty good job at HubSpot when it comes to culture (many would argue that it's one of our biggest advantages). We've raised over $50 million across four rounds of capital and 6 investors and have managed to maintain the core of our culture. Brian notes: The act of raising money and having a new board member is not what will screw up your culture. It is when you bring in new team members that things can go awry. Every time you bring in a new exec, the exec team sort of needs to re-form itself and re-gel. If you bring in a crony of the VCs that doesn’t fit and who isn't TAGFEE, that’s where the culture blows up. [This last point is something I haven't personally experienced, but saw through other CEOs I know through a CEO group I joined]

We both are super-impressed with what you've done and that you've done it without being (or becoming) a jackass — quite the opposite. We look forward forward to watching your continued success.

The following is a guest post by Ty Danco. Ty is an angel investor and startup mentor. Read more of his thoughts at tydanco.com.

Don't have an idea yet for a startup?

Then get off your butt and go work for someone else's cool startup! And the first place I would want to work would be a company that has momentum, powerful friends, and has been thoroughly vetted by pros.

How can you identify these opportunities? It is easy--just look at the companies the best venture capitalists are backing. A company that has just received a round of funding with star investors is definitially the kind of place you should be working at to best experience the highs and lows that startups are about...and by screening for companies to work for via the lens of a VC, you improve the odds that there are more of the highs.

Last of all, there's the hackathons, get-togethers, and other social events, planned and unplanned. But if it were me looking for a job, I'd go with the folks that have already passed one of the hardest startup challenges--raising bucks. As Damon Runyon said, “The race is not always to the swift, nor the battle to the strong...but that's the way to bet.”

PPS--If you're interested in becoming a VC, I give the same advice: go work for a startup first.

Like millions of others, I'm a big fan of Steve Jobs. He's a genius and an exceptional communicator. I came across this old video recently of Jobs doing a keynote at the Apple WWDC in 1997 (yes, I know that was 14 years ago). I found many of the insights he had at the time still relevant. What's interesting about this particular video is that it was during a time that Jobs was not CEO of Apple. So, he is speaking as an external advisor to the company. For the astute among you, you'll find that there are some inconsistencies between what Jobs said when he was not CEO and how he is behaving now when he is CEO. Particularly is take on "openness" and not reinventing wheels and such.

I think you'll find the video educational and interesting. I took some of my favorite snippets and included them below. I've also included a full transcript of the video, in case you prefer to read these things instead of watch the video.

Enjoy.

16 Brilliant Insights From Steve Jobs Circa 1997

1. Apple's strategy revolves around one fundamental concept, which is to make some really great products.

2. March forward one foot in front of the other. The press and the stock price will take care of themselves.

3. This whole notion of being so proprietary in every facet of what we do has really hurt us.

4. There are a lot of smart people that don’t work at Apple.

5. If we can be much better without being different, that would be fine with me. I want to be much better. I don’t care about being different.

6. The fact that Apple controls the product design from end to end: hardware and software gives us an incredibly unique opportunity. It's the only company in the industry that does that.

7. Every good product that I’ve ever seen in this industry and pretty much anywhere, is because a group of people cared deeply about making something wonderful that they and their friends wanted.

8. If Woz and I could have went down and plunked down 2000 bucks and bought an Apple II, why would we have built one? We weren’t trying to start a company; we were trying to get a computer.

9. It’s incredibly stupid for Apple to get into a position where for Apple to win, Microsoft has to lose. That’s really dumb.

10. This is my personal opinion. I believe Apple should license everything.

11. For the next several years, our job is to not reinvent the world. It’s to take something that we know exists already but hardly anybody’s got it, and get it out to them.

12. The way you get programmer productivity is by eliminating lines of code you have to write.

13. You’ve got to start with the customer experience and work backwards for the technology.

14. The customers aren’t going to measure us on how people tried or how hungry they were. They’re going to measure us on what they see.

15. Don’t get freaked out by Microsoft any more than we were freaked out by IBM when we started Apple.

16. I really hope that you embrace this as much as the team at Apple is. Because we have a chance to do something really good.

Full Transcript of Steve Jobs Apple WWDC Keynote 1997

Steve Jobs: Good Morning. Thank you very much. I really appreciate that.

I wanted to come and have a chat this morning. I know you’ve been getting lots of presentations all week so I didn’t want to do a big fancy presentation. What I want to do is just chat, and so we get to spend 45 minutes or so together and I want to talk about whatever you want to talk about. I have opinions on most things so …. I figured if you just wanted to start asking some questions, we’ll go to some good places.

Just to set the tone a little bit, I’m actually pretty excited about the way things are going. I think that there are some really good people who you met this week running the key areas of Apple now, and I think they are making enormous progress toward executing what is a pretty clear strategy. And that strategy revolves around one fundamental concept, which is to make some really great products. And I believe very firmly that there is still a very sizable market for some really great products and there are some giant holes that we can fill with your help. So, I am open to entertaining any of your questions and I hope you have some good ones this morning!

Question: What about OpenDoc?

Steve: What about OpenDoc? What about it? It’s dead, right? Well, let me say something. I know some of you spend a lot of time working on stuff that we put a bullet in the head of. I apologize. But Apple suffered for several years from lousy engineering management. I have to say it. And there were people that were going off in 18 different directions doing arguably interesting things in each one of them. Good engineers – lousy management. And what happened was you look at the farm that’s been created with all these different animals going in different directions and it doesn’t add up. The total is less than the sum of the parts. And so we had to decide, “what are the fundamental directions we’re going in?” and “what makes sense and what doesn’t?” And there were a bunch of things that didn’t. And microcosmically they made sense, macrocosmically they made no sense. And you know, the hardest thing is … you think about focusing, right? You think, “well, focusing is saying yes”. No, focusing is about saying “no”. Focusing is about saying no. And you’ve got to say “no, no, no”. When you say no, you piss off people. And then you go talk to the Santa Fe Mercury and they write a shitty article about you. You know? And it’s really a pisser, because you want to be nice, you don’t want to tell the Santa Fe Mercury a person was asked to leave or this or that. So you take your lumps. And Apple’s been taking their share of lumps for the last 6 months in a very unfair way and has been taking them like an adult. And I’m proud of that. And there is more to come, I’m sure. I read these articles about some of these people that have left. I know some of these people. They haven’t done anything in 7 years. And you know, they leave and it’s like the company’s going to fall apart the next day. And so, you know, I think there will be stories like that - but focus is about saying no. And the result of that focus is going to be some really great products where the total is much greater than the sum of the parts. And OpenDoc… I was for putting a bullet in the head of OpenDoc. I mean, I think it was great technology but it didn’t fit. The rest of the world isn’t going to use OpenDoc. And I think as a container strategy there is some stuff in the java space that is much better. And even the OpenDoc guys were basically trying to rewrite the whole thing in java anyway, which was a restart. So, it didn’t make sense. Yes, sir?

Question: What do we do about the press? Wall Street Journal reporters get up in the morning, sell Apple short and then go write stories about us. And, it’s clear that it’s perception versus reality. They don’t know shit about operating systems. They don’t know anything about tools. They don’t know what’s going on in the future. They don’t know that we’re building icebergs, and building from the bottom up.

Steve: Sure. You know, I’m sure that a lot of you have had this experience where you’re changing, you’re growing as a person and people tend to treat you like you were 18 months ago. And it’s really frustrating sometimes when you’re growing up and you’re becoming more capable and you’ve had some personality quirks you’ve kind of gotten over, whatever it may be. And people still treat you like you were a year to 18 months ago. It can be very frustrating. Well, it’s the same with a company. It’s the same with the press. The press is going to have a lag time, and the best thing we can do about the press is embrace them, do the best we can to educate them about the strategy. But the key part is to keep our eye on the prize. And that is turning out some great products, communicating directly with our customers as best we can, giving the community of people that are going to make this stuff successful like yourselves in the loop so you know everything, and just marching forward one foot in front of the other and it’s like the stock price… the press and the stock price will take care of themselves. By the end of this year, it’s going to look quite different. And I’m like an old man now in this industry and I’ve seen ups and downs and when you see enough of them, you know that’s going to happen. So, when you get up in the morning and the press is selling Apple short, go out and buy some shares. That’s what I would do. That’s what I have done.

Question: Apple certainly has a tradition of introducing new technology to , but lately Apple seems more apologetic about being different and it is proud about being different. (inaudible) I was just wondering years after introducing the Macintosh, what Apple can do to get it’s balls back.

Steve: I gotta tell you, I have a little different point of view on that. I think Apple’s had its head in the sand over the last many years. There has been so much that’s happened in terms of network computing as an example, that Apple’s completely missed out on it. The Mac is probably one of the least network computer communities in the world in terms of really making use of powerful networks. I mean, like when Next joined Apple, Next had an extremely sophisticated network infrastructure for doing network computing compared to Apple and even now we struggle getting the Apple folks to understand it. Because the Mac has been, because of all of this proprietary-ness in every way, because of the attitude of arrogance that “we can not only invent around networking, but invent around this and that…” it’s in its own little world and the rest of the world with so much invested passed it by. And so, we need to bring the Mac up into the modern world in many areas like network computing. And to do that, because we weren’t first, because we didn’t set the standards and they’ve already been cast in stone, we have to use them. So, I think the wisdom here is not to say “we’ve got to invent everything ourselves”. The wisdom here is to know what 10% or 20% or 30% probably at most of the stuff we have to invent. And what we should go use that exists. We didn’t invent postscript, did we? We got LaserWriter out of it. And we were the first out there with the LaserWriter. So, I think this whole notion of being so proprietary in every facet of what we do has really hurt us. And again, the management and vision we had encouraged that. Encouraged people to go reinvent the wheel out there our own way. And yeah, it might be 10% better but usually it ended up being about 50% worse because there are a lot of smart people that don’t work at Apple, too.

Question from same guest: The only other thing I’d like to add is that I think it’s important that Apple be perceived as different because if Apple says “We’re just like everybody else but better, that really doesn’t say anything at all.

Steve: No, I don’t think it’s good that Apple is perceived as different. I think it’s important that Apple is perceived as much better. And if being different is essential to doing that, then we have to do that. But if we can be much better without being different, that would be fine with me. I want to be much better. I don’t care about being different. We’ll have to be different in some ways to be much better, but that’s the prize, wouldn’t you agree?

Question: I would agree, but Apple needs to articulate those differences as well. The goal is to be better, but for the general public, it has to be a whole lot better and it has to be in some ways different.

Steve: It has to be a whole lot better.

Question: Good morning. You said in your opening ground rules that there were lots of holes that Apple couldn’t necessarily do themselves without this community. As a visionary, do you think you could spend a couple minutes talking about those goals?

Steve: Sure. Much of the great leverage of using computers these days is using them not just for computationally intensive tasks but using them as a window into communication intensive tasks, as you know. And never have I seen something more powerful than this computation combined with this network technology that we now have. So, not only networks throughout an organization of course, the wide area networks through the Internet. And, I just want to focus on something that’s very close to my heart, which is living in a high-speed network world to get your job done every day. Now, how many of you manage your own storage on your computers? How many of you back up your computers, as an example? How many of you have had a crash in the last three years? Four years? Right.

Ok, let me describe the world I live in. About 8 years ago, we had high-speed networking connected to our now obsolete Next hardware (we were running Next at the time). And because we were using NFS, we were able to take all of our personal data, our “home directories” we called them, off of our local machines and put them on a server. And the software made that completely transparent and because the server had a lot of RAM on it, in some cases, it was actually faster to get stuff from the server than it was to get stuff off of your local hard disk because in some cases it would be cached in the RAM of the server if it was in popular us. But what was really remarkable was that the organization could hire a professional person to back up that server every night, and could afford to spend a little bit more on that server, so maybe it had redundant disk drives. Redundant power supplies. And you know, in the last 7 years, you know how many times I have lost any personal data? Zero. Do you know how many times I back up my computer? Zero. I have computers at Apple, at Next, at Pixar and at home. I walk up to any of them and log in as myself. It goes over the network, finds my home directory on the server, and I’ve got my stuff, wherever I am. And none of that is on a local hard disk. Now, what’s really interesting to me is that gigabit Ethernet is coming.

With gigabit Ethernet, it is faster in every case to talk to the server than it is my local hard disk. One of the things I’m really excited about is to look at that personal computer and take out every moving part except the keyboard and mouse. I don’t need a hard disk in my computer if I can get to the server faster. Because I look at that network connection as MFS dialtone. I get Internet dialtone and MFS dialtone over that wire. And I don’t care how it’s done. I don’t care what box is at the other end. We have ________ at Next. Big one – spend half a million bucks on it. It was worth it. We did a lot of software development. Nobody ever lost anything. Nobody had to worry about that stuff. You could have smaller ones. But managing a network like this is a pain in the butt. Setting it up, getting it all to work is really complicated.

One of my hopes is that Apple can do, through this new type of network (not so new, but for the average person it’s new) with gigabit Ethernet technologies and some of the new server stuff that’s coming down the pike and some thinner hardware clients, that Apple could make that as plug and play for mere mortals as it made the user experience over a decade ago. That’s one of the things where I think there’s a giant hole and I can’t communicate to you how awesome this is, unless you use it. And what you would decide within a day or two is that carrying around these non-connected computers or computers with tons of data and state in them is byzantine by comparison. So, there is about 3 or 4 things like that, where I think there is enormous opportunity and a lot of times both in people and in organizations, your greatest strength also can be your greatest weakness. Apple has been highlighted as having an incredibly great weakness of being totally and vertically integrated. It doesn’t make its own semi-conductors but it makes the hardware, it makes the software, it controls the user experience, it does the marketing. And many people are constantly calling for Apple to get out of the hard ware business because of that weakness that they perceive. I don’t agree with that. I perceive it as a potential weakness if not managed right. I also perceive it as Apple’s greatest strength if managed right.

I’ll give you an example. Plug and Play. To get anything done in the PC industry, it seems to take years. Plug and Play was an initiative that was launched 5 years ago. It took 2 years to get it all together between Microsoft and Compaq and an Intel fought with them and then finally got Intel into the fold… and here we are 5 years later, and still it doesn’t really work. You can imagine how long it will take them to make a thin client standard, and servers that plug and play within clients easily. I mean, we’re into like, you know, the third millennium. So, the fact that Apple controls the product design from end to end: hardware, software… gives Apple an incredibly unique opportunity. The only company in the industry that does that. An incredibly unique opportunity to tackle some of these really narly complex problems that could have enormous potential advantage in the market if we could solve them. And I think solve them literally a half a decade to a decade sooner than the 93 headed monster out there in the Intel space. Now, they have their advantages too, don’t get me wrong. But I think one of our great advantages is that we can really control all the disciplines to actually implement a vision much faster, if we can get ourselves all going in a few directions.

Question from last guest: That sounded really great, and as you were talking I was getting sort of caught up in it. And then it occurred to me: That’s a really great vision for Apple. But then, I asked about holes for developers.

Steve: Uh huh. I’ll give you tons of simple ones. Microsoft hasn’t committed to port their suite of applications yet, have they? For Rhapsody. What are you waiting for?

Adobe – do you know how many copies of Photoshop Adobe ships every month? Bazillions! That’s the foundation of Adobe – Photoshop. Adobe has not, to my knowledge, committed to port Photoshop to Rhapsody yet. What are you waiting for? There was a company called Lighthouse, that was actually bought by Sun about 6 months ago. They were the best next step developer. They had 18 developers, ok? They had by far and away the best presentation application I’ve seen in my life called Concurrent. I still use it today. They had a suite of 5 different apps. And each one was best of breed. The best spreadsheet I’ve ever used in my life, called Quantrix. How many of you use Improv here? Ok, Improv is the best spreadsheet on the planet, because it incorporates a whole new way of thinking about spreadsheets for people like me that want to model things. It’s phenomenally powerful. And Lotus couldn’t compete with themselves with 1.2.3 so they gave it up and Lighthouse copied it. 18 developers. 5 apps. Because of the power of this development environment.

What Apple is going to be putting in your hands is a system that you can build apps for 5-10 times faster than anything out there. Period. And you can choose to do one of two things or somewhere in the middle with this power. 1. You can make existing complexity apps 5-10 times faster, which means that 3 people really can go into a garage on day one with a concept and come out in the market with a product 6-9 months later. I haven’t seen that in our industry in 10 or 12 years. And that’s very, very, very exciting to me. And some people say, “Well, it will only run on a Macintosh, or it will only run on Rhapsody selling on Intel maybe and selling on a Macintosh. Jesus, it’s only a single digit percentage of the market.” Well, Jesus, it’s only 3+ million copies a year. I wouldn’t mind selling into that market. It’s huge, especially if you’re a 3 person, 10 person, 18 person software development company. Lighthouse was making a good living selling to the next step market. Give me a break!

So, you know, I think there’s a huge market out there. And, I think there’s still tremendous loyalty towards Apple by some of these customers. If Adobe doesn’t want to write the next generation Photoshop on Rhapsody, some of you should! Maybe they’ll buy you… who knows? But, the publishing market out there would love to see the next generation but even more so, you know who would love it even more than them? Apple. Right? You walk in here and say “I’ve got something that’s 5 times better than Photoshop for these publishing people”. And if enough of the publishing people agree to where you convince Apple that that’s really the case… do you know how much Apple spends on marketing each year? They should spend some of it on these apps. And telling the world about them. So, if you come up with something really great, I think it’s going to get out there. And I think this is pretty unique opportunity.

I want to get back to the last point I was making. One of the other things you can do with these powerful tools in addition to building a current complexity 5-10 times faster, is build an app you couldn’t build on any platform. And that to me is the most exciting. Build an app you could not build on any other platform, because it’s all about managing complexity, right? You’re developers, you know that. It’s all about managing complexity. It’s like scaffolding, right? You erect some scaffolding, and if you keep going up and up, eventually, the scaffolding collapses of it’s own weight, right? That’s what building software is. It’s how much scaffolding can you erect before the whole thing collapses of its own weight. Doesn’t matter how many people you have working on it. Doesn’t matter if you’re Microsoft with 3-400 people, 500 people on a team. It will collapse under it’s own weight. You read “The Mythical Man-Month”, right? Basic premise of this is a software development project gets to a certain size where it can add one more person. The amount of energy to actually communicate with that person is actually greater than their net contribution to the project so it slows down. So you have local maximum and then it slows down. We all know that about software. It’s about managing complexity. These tools allow you to not have to worry about 90% of the stuff you worry about, so that you can erect your 5 stories of scaffolding, but starting at story number 23 instead of starting at story number 6. You can get a lot higher.

Question: You mentioned stocks and how we can really look forward to that toward the end of the year. I’m wondering, can you make any comment whatsoever on Larry Ellison?

Steve: There’s lots of comments one could make about Larry Ellison. I’ve never dated Larry, so that excludes a bunch of them. No, actually Larry is my best friend, and you put me in a slightly awkward situation. I have certainly encouraged him to not seek to take control of Apple, because I think Apple is on a good course right now. And I think Larry is on an awesome course. I mean, one of the things I told him was, “Look, if you took a poll in Silicon Valley of what company you’d like to run, Oracle would be at the top of many people’s lists. Second largest software company in the world, one of the most dynamic companies on the planet.” And Larry built it from scratch and he’s got one of the greatest jobs in the world. So I think Larry has made his public pronouncement that he’s going to stick to running Oracle. So, I wouldn’t worry about that. And I think what we need to worry about is just making some great products and getting some applications on them and telling our customers about both of those things.

Question: A few weeks ago, The Wall Street Journal announced the profit figures for Microsoft. And they also said that that in this industry, the only companies really doing well are Intel, Microsoft and perhaps Compaq. Could you comment on the possibility of competing against monopolies that the justice department seems to for some strange reason avoid prosecuting for antitrust?

Steve: The day we started Apple computer, IBM was far more powerful in the computer industry than Microsoft and Intel are today. Because they not only controlled the technology, they controlled the customer. They had direct contact with the customer. And, so, we should just get out. I mean, I should have just nudged Woz and said “Hey, forget it. Not a chance”. But, we were too stupid to know that. We hadn’t gone to business school. We didn’t read the Wall Street Journal. We didn’t know what the Wall Street Journal was. I’d never seen a Wall Street Journal. And that served us well. And so, what can I say? I think every good product that I’ve ever seen in this industry and pretty much anywhere, is because a group of people care deeply about making something wonderful that they and their friends wanted. You know? They want to use it themselves. And that’s how the Apple I came about, that’s how the Apple II came about, that’s how the Macintosh came about. That’s almost everything I know that’s good has come about. It didn’t come about because people were trembling in a corner worried about some big company stomping on them. Because if the big company made the product that was right, then most of these things wouldn’t have happened. If Woz and I could have went down and plunked down 2000 bucks and bought an Apple II, why would we have built one? We weren’t trying to start a company; we were trying to get a computer.

I’ll give you an example. I get about 200 email messages a day, sans all the get rich quick ones from the Internet. And I’ve been in that mode now for about 5-6-7 years. And email, to me, is the most important app I use. And I’ve used every email system I know of out there, and I can tell you that the one on NeXTSTEP or Rhapsody is literally almost an order of magnitude better, more productive, than anything else I know. I mean, I walk around Apple and they are using the worst mail sytem in the world. And I know we could improve the productivity inside Apple 30% if we just give them a good email system. And so, it’s amazing to me that something as obvious as email is so broken out there. Netscape’s is awful. I mean, everybody’s is awful. And if something so obvious as email is so broken… and the other one I mentioned before: spreadsheets. If you use Improv or Quantrix for a week, you would go, “How come this hasn’t completely replaced Excel?” for 75% of the people out there. 25% will still want Excel, for good reason. But for 75% of the people, why hasn’t this replaced it? And there are no answers to these questions except – “let’s go do it!” And that’s my attitude about this thing.

The other thing I feel very, very, very strongly is: It’s incredibly stupid for Apple to get into a position where for Apple to win, Microsoft has to lose. That’s really dumb. I mean, I don’t expect the Federal Government to break up Microsoft. For a lot of reasons, the least of which is the Federal Government is a monopoly. I mean – they’re buddies! So, Microsoft is a fact of life. They’re like the air we breath, you know? So, probably a better analogy is like bottled water, because you do have to buy it. But nonetheless, Apple can win without having Microsoft lose. I firmly believe that. And hopefully, Microsoft will increasingly over time realize that that is the case, and that Apple represents a quite profitable part of their business. And they seem to be coming around to that point of view. An alliance has been announced between Microsoft and Apple. So, I really really strongly feel that setting Microsoft up as Satan and having a holy war against Microsoft would be exactly the wrong thing for Apple to do. There are so many opportunities out there where Apple can really have tremendous advantage and not have to go head to head with Microsoft, but really go right to the customers.

Question: I was hoping that you would venture an opinion this morning on how you see the future evolution of the Macintosh compatible market.

Steve: This is my personal opinion. I believe Apple should license everything. With a few exceptions. But I think Apple should get a fair price for it. And I think the clone set up, the way it was set up was done very poorly – about 3 or 4 years ago. For one thing, Apple licenses the hardware design and forces the clone makers to use it. That’s stupid. Let the clone makers do their own hardware design – let them do whatever hardware they want. Right? Don’t tie their hands. But if want to pay extra for that, if they want to use Apple hardware. Fine, but if they don’t, let them design their own. And on the software, Apple should get a fair price based on volume. As an example, if I’m a clone maker - as you know, some of the low end Macintoshes, whether they are compatibles or not, probably don’t make much money. As a matter of fact you could even imagine they might lose money just to get people in the fold. And, to offset those kinds of low margin products, we need some higher margin products at the high end. So if you’re a clone maker you think, “Wow, I think I’ll give Apple ten bucks for the software and I’ll go after the $5000 Mac market. Well that would be really stupid for Apple to do. Because this clone maker is just a leech. They are living off the fact that Apple has got this business model to not make much money on some levels and try to eek some back at the high levels by just going after the high level and paying ten bucks for the software, that wouldn’t be fair.

So you want people to pay more money if they are in lower volume, because the only way they can get to higher volume is to make some of those medium and low priced clones, too, and make less margin. And if they’re doing that, then they ought to get a lower price across their whole range of products. So I’ve been advocating to eliminate the licensing of the hardware and let the clone makers do whatever they want, and b) to raise the price for the royalty of the software to a reasonable level and make it a scale based on volume. And I think that’s the right thing to do. Some of the clone makers are going ballistic over it. It’s incredibly stupid. I mean, I don’t they that they ought to pay more for Rhapsody, as an example, than they do for other modern operating systems for licensing. But that’s not 10 or 20 or 30 bucks. And I think that’s where we’ll end up and I think everybody will be fine and I think the clone makers will have a much easier time and they won’t have to deal with Apple’s hardware. Maybe they’ll make some better hardware and maybe they’ll make some worse hardware and the customers will be fine. And I’m all for it. I just think Apple ought to get a little bit of value out of their software and not just out of the clone makers picking off their high margin products and paying ten bucks a copy. If they want to pick off the high margin products and pay a fair price for the software, let them have at it. So, that’s how I feel about that. But I’m not making the decision.

Question: Even so, I’m glad you’re here. You mentioned managing complexity. There’s a lot of people out there who are either not using computers or think of computers as something they have to babysit- they work for their computers. How can we get computers to where they work for people instead?

Steve: I don’t really know. I’m not sure what you mean. I don’t feel I work for my computer. I feel it’s a little invasive – I mean, I have a T1 in my house and you sort of get in the habit of answering emails within a few seconds after you arrive, so it can be invasive on family life. But ….

Question from last guest: How can it serve us more and go on and do things for us without us having to sort of watch. We have this whole system of “I click once, the computer does one thing… I click another thing…. It never goes on and works for me for 15 minutes…. I mean….

Steve: I guess my point of view is a little bit different on that. My point of view is that I’m routinely running 10-15 applications at once on my computer. They are all routinely talking to each other in a very wonderful way that I don’t have to pay much attention to, and I can move things between them very easily. And I’m connected in an extremely high-speed easy transparent productive way with my colleagues. It’s so much better than anything I see in the Windows or the Mac world today. That I will be happy if over the next 12-24 months as you guys roll out your apps that we can just bring this to everybody. Secondly, I know there’s at least 20 more apps that I’d love to be using, that haven’t been written yet. And if we can make those apps really easy to write, and if we can keep the Mac market far less expensive to market into than the Intel market, then we can all get a chance to use those great apps that you guys are going to write. So, my view is that for the next several years, like 3-4 years, our job is to not reinvent the world. It’s to take something that we know exists already but hardly anybody’s got it, and get it out to them. You know? And to be honest, it’s a lot like Xerox Parc. Xerox Parc had some of the things that were in a Macintosh, just nobody else had them. Well there’s thousands of people out there who use this now, but there aren’t millions and if we can get that out there, I think it’s going to change a lot. And, fortunately a lot of it is tried and true and been polished and refined and is pretty bullet proof so we’re not going to have to go through any embarrassing early moments, I hope.

Question from last guest: That would be cool. You mentioned tools. There is a great, wonderful NextStep demo where we have a visual way of building interface – it’s great. And then, all of a sudden, we’re back into text. (inaudible)

Steve: Here’s the deal. The way you get programmer productivity is not by increasing the lines of code per programmer per day. That doesn’t work. The way you get programmer productivity is by eliminating lines of code you have to write. Right? The line of code that’s the fastest to write, that never breaks, that doesn’t need maintenance, is the line you never had to write – right? So, the goal here is to eliminate 80% of the code that you have to write for your app. That’s the goal. And so, along the way, if we can provide WYS –this and WYS-that and visual this and visual that… well that’s fine. But the high order bit is to eliminate 80% of the code. When you drag a line into the interface builder you’re eliminating a line of code in one form. But that only goes so far. Maybe it can go further. I’ve seen a lot of demos that try to take it all the way back into the algorithmic part of the code base and none of them have ever been any good. If there are any good ones out there, show Bobby and he’ll show me. Would love to see them.

Question: You mentioned how good it is that Apple controls the hardware. (inaudible). There seems to be a conflict of interest here between Apple’s own hardware and some of the cloning hardware.

Steve: I don’t believe that’s true at all. The person running hardware at Apple, I’ve known for a decade. His name is John Rubenstein. I trust him with my life. He’s the best hardware leader I’ve ever seen in my life. He’s really really really good. He comes from very high performance systems and what his expertise is, is putting a lot of those high performance systems ____________ really cheap. He’s really good at that, really good at leading teams, really good talented engineering managers and engineers. And what he wants to do is build some kick ass stuff. Because the Mac hardware is not at the top of the food chain. And we want to get it there. And we are going to get it there. So, if there was something ready to go that was really good, I promise you, John would be shipping it yesterday. Ok? And in terms of the clone makers, I know that what John is pushing for very strongly, which I support 100%, is to tell the clone makers they can build their own hardware. That’s the easiest thing to do. Don’t be limited by what Apple does or does not release. Build your own. There’s a billion people out there building hardware. Look at the PC clone business. They all build their own hardware. They could have people build it for them. They could have people design it for them. So release them out of the bondage that they can only use Apple hardware. And they can do whatever they want. Matter of fact, they could build Rhapsody boxes with Intel processors in them if they wanted to. They could do whatever they wanted to. And that’s where I’m hoping Apple goes.

Question: Inaudible

Steve: No, I don’t. All I can tell you is that I know this 100% to be true. If Apple had a hot product, it would be shipping it tomorrow. Ok? And they have shipped a few hot products recently. And if there were any more before when the next batch were coming out, they’d be shipping them instantly. Apple is about having hot products. And, so nothing is being held up that’s any good. I guarantee you that.

Steve: Let me go through your preamble a little bit. I personally don’t think Apple is completely turned around. I think we’re turning it around. And I wouldn’t put it in the past tense. I think it’s like this right now. And I feel very confident in the team that’s managing the pieces of Apple right now. I think they’re doing a really good job. And the strategy I think is pretty doggone good. I feel very good about that and I think it’s turning around and I think you’re going to see more and more signs of that. I’ll give you my own opinion on this because marketing is a suggestive thing. It’s not a science. There’s a lot of art to it. And, my personal belief is that the medium really does communicate a lot about the message. In some cases, the medium overrides the message. And I personally believe that Apple should not be on television at all this year. It’s the wrong place to be for Apple. Because what it means is that Apple is trying to spend a lot of money to convince you that everything is ok. And what I think Apple ought to be doing is taking a fraction of that money and putting it in print. And I don’t mean 8 page Wall Street Journal ads. Because to me, again an 8 page Wall Street Journal ad is saying “I’m going to spend my wad to show you that I’m back”. And what Apple needs now is not spending a million dollars to tell people it’s back. It needs for the journalists to be saying Apple is back on page 1. Because if on page 7-14 Apple spends a million dollars saying we’re back but on page 1, a journalist writes an article saying they’re in the tank, who are you going to believe? As a matter of fact, that million bucks on page 7-14 is going to reinforce the message on page 1.

Question from last guest: Meanwhile, it’s the TV commercials that are influencing the sales. ___________________ They’re the ones who are bad mouthing us.

Steve: You know, I don’t buy it at all. I don’t buy it at all. I don’t think that’s true. I think that more than anything right now, PR is influencing purchase consideration in this category. Not advertising. So, I’m in the minority, but I have had a certain degree of experience in this matter. And I believe strongly that Apple really needs to talk about it’s great products, and it’s great customers and it’s great applications. And the best way for it to do that is in print in a very straightforward way. And I also believe very strongly that the high order bit of any marketing campaign is profitability. We send a boatload of money in any quarter marketing ourselves. If we lose money in that quarter, any positive momentum that we’ve created is completely erased. Profitability to me is the high order bit of marketing for Apple at this point in time. And I think we’re approaching that and I think we should just use every ounce of financial resources to get there and I think that will be very strong and very loudly heard. I think we should focus on PR and I think we should focus on print advertising and stay out of television this year, but I don’t make these decisions. So that’s my recommendation and that I’ve given Apple.

Question: I would like, for example, for you to express in clear terms how, say java, in any of it’s incarnations, addresses the idea (inaudible). And when you’re finished with that, perhaps you could tell us what you personally have been doing for the last 7 years.

Steve: You know, you can please some of the people some of the time, but…. One of the hardest things when you’re trying to effect change is that people like this gentleman are right in some areas. I’m sure that there are some things OpenDoc does, probably even more that I’m not familiar with, that nothing else out there does. And I’m sure that you could make some demos, maybe a small commercial app, that demonstrates those things. The hardest thing is: how does that fit in to a cohesive, larger vision, that’s going to allow you to sell 8 billion dollars, 10 billion dollars of product a year? And, one of the things I’ve always found is that you’ve got to start with the customer experience and work backwards for the technology”. You can’t start with the technology and try to figure out where you’re going to try to sell it. And I made this mistake probably more than anybody else in this room. And I got the scar tissue to prove it. And I know that it’s the case.

And as we have tried to come up with a strategy and a vision for Apple, it started with “What incredible benefits can we give to the customer? Where can we take the customer?” Not starting with “Let’s sit down with the engineers and figure out what awesome technology we have and then how are we going to market that?” And I think that’s the right path to take. I remember with the Laser Writer. We built the world’s first small laser printer, as you know. And there was awesome technology in that box. We had the first Canon cheap laser-printing engineer in the United States here at Apple. We had a very wonderful printer controller that we designed. We had Adobe’s PostScript software, we had AppleTalk in there. Just awesome technology in the box. And I remember seeing the first print out come out of this. And just picking it up and looking at it and thinking, “You know, we can sell this”. Because you don’t have to know anything about what’s in that box. All we have to do is hold this up and say, “Do you want this?” And if you can remember, back in 1984, before laser printers, it was pretty startling to see that. People went, “Whoa”. And that’s where Apple’s got to get back to.

And you know, I’m sorry that OpenDoc is a casualty along the way, and I readily admit that there are many things in life that I don’t have the faintest idea what I’m talking about. So, I apologize for that too, but there’s a whole lot of people working super super hard right now at Apple. Avi, John, _______, Fred. The whole team is working, burning the midnight oil, and hundreds of people below them, to execute on some of these things and they’re doing their best. And some mistakes will be made along the way. That’s good, because at least some decisions are being made along the way. When we find a mistake, we’ll fix it. I think what we need to do is support that team going through this very important stage, as they work their butts off. They’re all getting calls being offered three times as much money to go do this and that. None of them are leaving. And I think we need to support them through this and write some damn good applications to support Apple out in the market. That’s my point of view. Mistakes will be made, some people will be pissed off, some people will not know what they’re talking about, but I think it’s so much better than where things were not very long ago. And I think we’re going to get there.

So, I think we’ve got time for just a few more questions.

Question: I work for a large corporation that is seriously reconsidering it’s development targeting to the Macintosh. They sent me out here on last year’s WWDC and I came back with a lot of new technology and I really impressed them with “We have Gil on board now, we’ve got a next generation OS we’re moving forward with. I’ve lost a bit of credibility with that. Now, Monday morning, I’ve got to go back to them and say “Now, we really mean it this time. We’ve got great new technology and I really do believe in the new strategy.” If you were me, if you were a software developer like me who works for a Fortune 500 corporation, what would you tell my people to convince them to stay with the Macintosh?

Steve: Good question. Let me ask you a few questions: Do you use primarily off the shelf applications or do you roll some of your own apps?

Guest: It depends on what item you’re talking about. Mostly I use Code Warrior and I use Photoshop and some of the word processing things. The things I write are generally for my company or things that I’ve written for myself.

Steve: I guess what you’re saying is that you’re trying to convince your company to stay with Macintoshes. Does your company use those Macintoshes to employ custom apps that you write for your company or does your company use those Macintoshes to employ primarily shrink wrapped apps?

Guest: Mostly it’s support software for hardware that they sell that is targeted for both PCs and Macs.

Steve: Do they write that software themselves?

Guest: Yes, they do.

Steve: Well, one of the things you could say is, if they could write that software 5-10 times faster and deploy it on Mac and with Rhapsody on Intel on PCs, would that be of interest to them?

Guest: I think it would.

Steve: I would throw that into the mix of arguments I would use. And the other thing I would do is… Guarino Deluca is here. He runs marketing for Apple. Go find this guy. He’s actually got a white paper on this you should get your hands on.

Guest: Thank you.

Question: A while ago, Apple had a vision of a user interface. I wouldn’t have to do work, my machine would do it for me using agent software, knowledge navigator, intelligent agents. Are we going to see the like of that some time soon? Because, I’m signed up for that.

Steve: It turns out there is so much headroom to make the network world we live in so much more productive, so much easier and so much more fun than it is now that we know how to do. It’s not research. We know how to do this. That to bet our future right now on the results of research in the agent world, where you can pick up all sorts of magazines and read people spouting off. There’s nothing tangible about it. It is research at this moment. To bet our future, to bet our next 5 years on research – this is something that is so tangible that we know, that we can feel, that we can touch – would be foolish.

The core of our strategy is to take advantage of the dramatic headroom to make this connected world so much more productive for the rest of us, rather than just an individual computer, which was the original vision of the Mac. To take that next big leap and make that connected world so much more productive… that’s what we’re doing. Not that we’re not working on agents. There’s people working on agents in the back. But the core of the strategy is focused on what I just said. And, I think you’re right. I think at some point, that they’re going to start doing more for us in ways we can’t imagine. But even before we get to that, we can make life 5 times better even without that research being successful.

Question: What do you think Apple should do with Newton?

Steve: Ha. You had to ask that. I’m in the minority. And what I think doesn’t really matter about this. I think that most companies can’t be successful with one backup system software. Rarely can they manage 2. And we, I believe, are going to succeed at managing 2 during the next several years with Mac OS and Rhapsody, which is a superset of that. I cannot imagine being successful trying to manage 3. So, I have a sort of a law of physics disconnect with trying to do that. I just don’t see how it can be done. And I don’t think that has anything to do with how good or bad Newton is, or whether we should be making 800 dollar products or 500 products, which I think we should. It has to do with – I don’t see how you manage 3 software steps. So that’s what I think.

Guest: Do you actually have a Newton as a user?

Steve: I tried a Newton. I bought one. I bought one of the early ones. I thought it was a piece of junk. I threw it away. I bought one of the Motorola Envoys, I thought it was a piece of junk after using it for 3 months. I threw it away. I hear the new ones are a lot better. I haven’t tried one. I will but, see here’s my problem: My problem is to me, the high order bit is connectivity. The high order bit is being in touch connected to a network. That’s why I bought the Envoy. It had a cellular modem in it. And I don’t think the world is about keeping my life on this little thing. I’m already get into my computer when I get back to my base station. To me, what I want, is this little thing I can carry around with me that’s got a keyboard on it. Because to do email you need a keyboard. And you need to be connected to the ‘net. So if somebody would just make a little thing where you’re connected to the ‘net at all times, had a little keyboard with a modem in it, I’d like to buy one. But I don’t see one of those out there. And I don’t care what OS it has in it. So, I don’t want a little scribble thing. But that’s just me. One last question.

Question: This is going back to PR and marketing. First off, would you be interested in taking a slightly more evangelistic role within the company because yes, you are a single person, you are in the minority, so to speak, but when you talk it does have a lot of effect because basically a stone in the pond produces a lot of ripples. Second thing that ties to that is - on the marketing side – going to print, that make sense. And going to get the writers to write stories and back things up will have a very positive effect and that’s correct. But the marketing side of the house seems to not be in sync with everything else. In particular, marketing agencies. What would it take for Apple to work with a marketing agency that has a vested interest in making things successful? Personally speaking, I don’t feel that the president of a marketing organization has Apple’s best interest at heart. Because they’re not hungry. They have no drive. They have no reason to make something fly because if they don’t, we die along with them.

Steve: Let me answer your questions in reverse order. I think Apple needs to be working with really great agencies. I don’t care if they are hungry or if they’re not. I don’t care if they’re west coast or east coast. They just need to be great. The results need to be great. The customers aren’t going to measure us on how people tried or how hungry they were. They’re going to measure us on what they see. And I agree with you. I don’t think 100% of people Apple is working with are great. And I think the person running marketing, Guarino Deluca is really good, and he knows that and he is working through those things in a priority list. And he’s starting with the most important ones and working his way down. And so, I think your point of view is absolutely shared. And it will take 4 months to see some of those things happen and probably a few more months after that to get results, because there are more important things that need to be done. And are being done.

In terms of my role, when Apple bought Next, Gil asked me to be an advisor to him and I agreed to do that until he told me go away or I decided he wasn’t listening to me. And neither of those has occurred. And I’m very grateful for the opportunity and like working with him. The area where I really concentrated my energy over the last several months has been to help Gil re-architect the organization of the company and his senior lieutenants. And so the company went from being a very divisionally oriented company with a zillion P&L centers and it was very complicated – to a very simple organization. Very functionally organized, Avi (?)_______ came in and he’s running all software now. I think Avi is really first rate. I think he’s one of the best software executives on the planet. And I think he’s doing a really good job. John Rubenstein came in to run hardware, and I talked a little bit about John earlier. He is tops. Guarino Deluca is running marketing. He previously ran Claris and I think he’s doing a very fine job. Fred Anderson, the CFO, is top notch. And the rest of the team as well. Manufacturing, etc. is very, very good. So, I feel like the team can execute the plan is pretty strong, and they are working well together as a team. To me, that’s the high order bit. It’s not going around giving speeches and things like that. Apple’s problem has been not a lack of air volume, coming out of Apple. It’s been execution and lack of good management. It’s just the basic stuff. And I think the basics are getting put in place. And to a large extent, they’re already put in place. And that’s filtering down through the organization. Results don’t happen over night, but I think that they’re starting to happen already. From the new products, I think are good, and I think by the end of this year it’s going to be much clearer that things are going like this.

So, my suggestion to you is don’t get freaked out my Microsoft any more than we were freaked out by IBM when we started Apple. Even though you may not fully see it, there has been a key change at Apple in the management of the company. There are some very strong people running a functional organization. I think that I have a lot of confidence in the senior team of the company to execute and I think they’re going to. I think the move to Rhapsody represents a very discontinuous opportunity for software developers to compete and to make some really great products. And Rhapsody is going to run on everything from PCs to the new Mac to even the old Mac OS and I think there’s a tremendous opportunity to embrace this new stuff. So, if I were you, what I would do is go out and buy any box that runs Rhapsody and start taking a look at it, and start developing some code on it. And I think you’re going to be blown away. And I think there’s an opportunity to make some really wonderful apps and the customer base that we have, a few tens of millions of people, can really start to zoom ahead as the rest of the industry in what they can do. The capabilities they have, the experience they have and the fun that they have. And a lot of it is going to be up to you and I really hope that you embrace this as much as the team at Apple is. Because we have a chance to do something really good.

I really appreciate the chance to come hear some of your questions and hopefully answer some of them. Thank you.

Derek just came out with a simple, highly readable book called “Anything You Want”. It's short, to the point and inspiring. Also, the book is published through "The Domino Project" by Seth Godin.

Before I could get this article published, the book has climbed from a 12,000 ranking on Amazon to about 1,000. [Update it's all the way at #6 now]

Inspiring Ideas From “Anything You Want” By Derek Sivers

1. Business is not about money. It's about making dreams come true for others and for yourself.

2. When you make a company, you make a utopia. It's where you design your perfect world.

3. Success comes from persistently improving and inventing, not from persistently promoting what's not working.

4. A quick glance and common sense should tell you if the numbers will work. The rest are details.

5. “Revolution” is a term that people use only when you're successful. Before that, you're just a quirky person who does things differently.

6. When you're on to something great, it won't feel like revolution. It'll feel like uncommon sense.

7. If you're not saying “HELL YEAH!” about something, say “no”.

8. Start now. No funding needed.

9. After we grew to 50 employees, people started pitching me on how I needed an official employee review plan, sensitivity training, Terms and Conditions postings, and all this corporate crap. I got such joy out saying no to all of it.

10. In a perfect world, would your website be covered with advertising?

11. Resist the urge to punish everyone for one person's mistake.

12. If you find even the smallest way to make people smile, they'll remember you more for that smile than for all your other fancy business-model stuff.

13. Don't try to impress an invisible jury of MBA professors. It's OK to be casual.

14. No matter what business you're in, it's good to prepare for what would happen if business doubled.

15. In the end, it's about what you want to be, not what you want to have.

16. When you sign up for a marathon, you don't want a taxi to take you to the finish line.

17. There's a big difference between being self-employed and being a business owner.

18. Never forget that you can make your role anything you want it to be.

19. Anything you hate to do, someone else loves it. Find that person and let them do it.

20. Why he gave his company away to charity: I get the pride of knowing I did something irreversibly smart before I could change my mind. Most of all, I get the constant, priceless reminder that I have enough.

The following is a guest post by Dan Weinreb. He was a co-founder of Symbolics and Object Design. He is now a full-time software developer for Google, and an angel investor as a member of Common Angels. You can read more of his thoughts at http://danweinreb.org/blog.

At the Nantucket Conference on Entrepreneurship and Innovation, I attended the last session, which was on "Seed Funding -- What's Happening Now, and What it Means". The four speakers were all venture capitalists; there were no angel investors per se. Fred Destin, speaker from Atlas Ventures, brought up the topic of how fast investors can respond to entrepreneurs to provide them with seed capital. He particularly criticized angel investing groups, saying that they can't act as quickly as his partnership can. I was the only person in the room who was a member of an angel investing group, in my case Common Angels, and I felt as though I ought to present the case for angel groups. I tried the best I could, but I wasn't prepared at the time. Here, I'll attempt to provide better answers. The following are my own personal opinions. I am not speaking for Common Angels.

Even at this session, there wasn't agreement on what "seed" means; Antonio Rodriguez even asserted that the term ought not be used (even though he used it, himself, later on). "Seed" doesn't even necessarily mean the very first money in; that might be self-funding, or "friends and family" money. It generally means the first "outside" funding, beyond those groups. It arrives early in the life of the company, often when there are only a few founders and nobody else. The goal of seed funding (in the sense I understand it) is to allow the company's key components to be tested. This can include clarification of the technology concepts and of the market, as well as prototyping it and trying it out on some potential users. The next time funds are raised, the level of risk is a lot lower, and so the entrepreneurs can get funding on better terms.

The amount of capital involved depends a lot on the particular case. Different companies are different in so many ways that it's hard to generalize. I'm reluctant to put down numbers of dollars because of this, but if I'm going to talk about seed funding, there's no way for me to get away from it. So, I'd say a general ballpark figure for seed funding from an angel group might be in the area of $50K. Compare that with a seed-stage VC firm such as Atlas, which says that they can do as little as $100K but typically do $500K to $5M. (Some angel groups and VC firms also do larger rounds, not just seed rounds.)

Fred and the others claimed that angel groups are too slow for two reasons. First, groups aren't well-coordinated within themselves; there are too many people who have to agree, and there isn't structure to move nimbly. Second, they do "too much" due diligence.

About process, I was only able to speak for Common Angels. We have two full-time Managing Directors, who are as knowledgeable and able as any venture capitalist in the areas that we cover. They co-ordinate the members, and manage the process with the entrepreneurs, so that things move along reasonably promptly. In addition, they are able to make seed-stage investments from a co-investment fund by themselves, which allows us to move very quickly when that is warranted. (Admittedly, this is not typical of angel groups.)

About due diligence (investigation and study), it's hard to know how much is the "right" amount. With too little due diligence, you don't know what you're doing. It takes ability and time to judge which companies to invest in! Would you invest in a company without spending some time checking out the founders, the competition, the potential market, and so on? Common Angels has been around for a long time, and has experience with a lot of startups, with the whole range from success to failure, and the consensus is that it's wise to check these things out.

On the other hand, you need to move fast enough to not waste the time of the entrepreneurs or to lose out to other investors. Also, there is a point of diminishing returns. Sim Simeonov makes a persuasive case that results of these investments depend on a lot that can't be predicted ("exogenous factors"), and that it's a mistake to overestimate your ability to accurately "pick winners". So when I said "check out", the devil is in the details of how much checking out is right. (And I agree with Dharmesh Shah that potential angel investors should not be scared off or intimidated by the prospect of having to do an overwhelming amount of due diligence.)

Sometimes speed does matter. And it's important for investors not to keep a startup company hanging, or use up too much of their valuable time, which they need to be devoting to their company. But there is no "one right way" to invest, and it depends on a lot on the individual case. At Common Angels, we're always trying to improve our processes, which have changed several times since I showed up only a few years ago. We'll monitor it and see how it goes.

The speakers suggested that to speed things up, I should just go ahead and do angel investing by myself. In fact, there are several members of the Common Angels who also do extensive angel investing on their own. I explained some reasons why I, myself, am not in a position to make significant investments all by myself, unlike many of the people whom I think of as "real angel investors". Without the group, I would almost not be doing "angel investing" at all.

They countered by suggesting that I could pull together appropriate friends and partners, on a case-by-case basis, to help with any one investment. I had never been presented this idea before, and I was entirely unprepared to come up with a very good reply on the spot.

Since then, I've been time thinking more about this. I had heard about Nobel Memorial Prize-winning economist Ronald Coase's study of why corporations (companies) exist at all. After all, why not just subcontract everything, hiring absolutely everybody as an independent contractor to get particular jobs done? The main reason is what economists call "transaction costs". He laid this out in his book The Nature of the Firm. A good summary is provided in the Wikipedia article about the book. It takes a significant cost to assemble such a team. The same points can apply to an angel investing group. The team provides:

Diverse points of view

Investors willing to invest

Experts in the field, or connections to such experts

People willing to do due diligence, with competence in the particular area that needs to be understood

People who know how to best structure this particular investment

Legal expertise (contracts, intellectual property, etc.)

More ability to participate in, or help raise, subsequent rounds

A "brand name" to attract entrepreneurs

People to be watch over the companies, including being on boards of directors

Another famous economist, Adam Smith, in his book The Wealth of Nations, explains how division of labor can greatly increase efficiency and productivity. It's hard to get that if you need to put together an ad hoc team for every investment opportunity (including, it should be noted, the ones you decide notto invest in).

With all this talk about speed, it must be emphasized that speed is only one factor distinguishing investors. The entrepreneurs will be working so closely with the investors that it'll be like having a new business partner. Entrepreneurs must consider who will understand what they're doing, treat them well, be honest, give the right kind of help, and know when to get out of the way are all far more important. Lately, there is a lot of optimism, to the point where The Economist is even talking about a new technology "bubble". In a very optimistic environment, it's tempting to for investors to try to get in first and ask questions later. An entrepreneur should not necessarily go with whomever makes the first offer.

So, what do you think? As an entrepreneur, do you value speed above all else? What's your take on VCs vs. angels vs. angel groups. What are the tradeoffs you consider?

The following is a guest post by Brad Coffey, an early employee at HubSpot. You can follow Brad on twitter @BradfordCoffey

Back in March, Brian Halligan (our CEO at HubSpot) wrote a great post around his observations on why Sequoia wins at the VC game. Brian’s assessment was based on HubSpot’s experience raising our Series D and was spot on in my opinion. Sequoia is agile, yet disciplined. They are aggressive yet reasonable. They’ve taken the classic venture capital playbook and out-executed just about everyone. Incredibly impressive.

With all of their success though, Sequoia has a right to stay paranoid (#8 on Brian’s list). The VC industry is undergoing some massive changes and is in the process of being disrupted by a new breed of investors that are attacking the edges of the market and competing with a new, differentiated approach. Google Ventures, a co-investor alongside Sequoia in HubSpot’s series D, is one such firm. Google has a history of reinventing industries and questioning conventional wisdom – and they’re trying to do it again with their approach to venture capital.

6 Ways Google Ventures is Attempting to Disrupt the VC Industry

1) Engineering Support - This is the most unique and fascinating aspect of Google Ventures. Unlike most venture firms that compete on brand and ‘expertise’, Google Ventures has a unique – engineering focused - set of support they provide entrepreneurs: engineering scale consulting, UX/UI design research, and engineer recruiting aid. When the team at Google Ventures listed these services during our session for the first time, in my head it was: check, check, check. All challenges for HubSpot and pains that would be hugely valuable to improve. Compare that to the traditional pitch of VCs centered on a softer set of business model expertise and professional networking. It’s a point of competitive differentiation for Google Ventures and potentially a source of huge value for the entrepreneur.

2) Unmatched brand On Main Street - HubSpot, like many companies, doesn’t consider its target market to be the technorati that spend their days reading TechCrunch and debating Groupon’s latest valuation. Instead it’s the small businesses that make up a majority of America’s economy – and it is with this market that Google has a superior brand. This is potentially a huge point of differentiation for Google Ventures. For a B2B company like HubSpot, including Google Ventures as an investor validates our business model for main street America. These are people that may not even know about the term 'venture capital' -- they're happy just building profitable businesses.

3) Helping with the tech talent war – One of the key challenges for startups, particularly those in the Silicon Valley and Boston is the tech talent war. Meanwhile, Google gets over a million people sending their resumes in every year. The Wall Street Journal recently reported that Google Ventures has hired partners who will cull this database of applicants and help its portfolio companies win the talent war. The cash component of a venture capital financing is clearly useful. But, getting assistance in investing that cash into stellar talent is exceptionally valuable. Google Ventures is leveraging its unique position and strength in what is sure to be a popular value-add for its portfolio companies.

4) Access to Google Proper - This somewhat goes without saying but Google Ventures is uniquely positioned to provide entrepreneurs with access to the rest of Google. Google Ventures was very transparent in stating that in practice this is not more than a warm introduction to the right people – it can lead to some great opportunities for entrepreneurs and is another great point of differentiation. As one example from fellow Cambridge-based and Google Ventures backed startup SCVNGR, the company was the first to publicly launch with integration to the Google Places API last fall. This integration solved a major strategic challenge for the company and enabled the company to scale internationally. This is an introduction that few venture firms could make so cleanly.

5) Non-Traditional Deal Flow - One of the disruptions happening in the venture capital industry at large is a sharp increase in the amount of non-traditional deal flow. Firms like DST and Y Combinator are expanding the market by converting previous non-consumers of venture capital into consumers (at both the very late and very early stages) and growing the market as a result. Google Venture’s has entered the fray with its own launch of Startup Lab. The program, started last fall, is designed to provide Google Ventures investments with a space to grow and thrive on at the Googleplex campus (and potentially provide HubSpot with a west coast office down the road). Ideally this enables Google Ventures to leverage the heralded facilities at Googleplex and increase dealflow for these early stage companies. More uniquely, Google Ventures also recently announced a $10,000 start-up referral bonus for its 23,000 employees and has a promise of more innovative deal flow programsto come. Through these programs Google Ventures is attempting to leverage its unique position within Google and create exclusive deal flow channels.

6) Brilliant Insights - This item isn’t necessarily unique but I’d be remiss if I didn’t mention it. The folks at Google Ventures are smart. And although it’s not necessarily disruptive (there are lots of smart people in the venture community) with Google Ventures it was like they’d been secretly hanging around the halls of HubSpot the last 3 years. The most telling stat for me is this: I took almost no notes during a majority of the trip but came out of the initial Google Ventures pitch with pages of feedback. Great insights from smart people. Though not enough to disrupt the venture community by itself – it certainly doesn’t hurt.

So what do you think? Does Google Ventures have enough to disrupt the venture community or in a few years are we going to see them revert to competing with the business model and values proven by the established firms?

I have now spoken at the Business of Software conference for 3 years in a row. It is my favorite conference both as a speaker, and as an attendee. The reason is simple -- the content is great and the attendees are awesome. The following is a full video of my 60 minute session. If you enjoyed my talk from Business of Software 2009 or Business of Software 2008, you'll likely enjoy this too. I think it may be my best one so far. And, thanks to Neil Davidson, Joel Spolsky and Mark Littewood, I'm thrilled that I will be once again speaking at the Business of Software conference in Boston. If you're in the business of software, you should attend. It's a great use of your time.

The following is a full transcript of the session, for those that like to scan/read instead of watching video.

I would really appreciate your feedback. I do a limited number of speaking engagements every year, and am working towards getting better. If you've seen me speak before, would love to hear how you think this was compared to other times you've heard me. Thanks!

Dharmesh Shah at Business of Software 2010

Intro by Joel Spolsky:

Our next speaker before lunch is Dharmesh Shah . Many of you will know him from his awesome blog, OnStartups.com, which now has a Q&A section called answers.onstartups.com which part of the stock exchange network so it’s all one big beautiful overlapping thing. He’s the co-founder and CTO, I think, of HubSpot, which he told me, where he manages nobody, but provides a great deal of leadership. And this is, I think, his third company. So, please welcome Dharmesh Shah.

(Applause)

Dharmesh Shah:

How’s everybody doing? So you just got done watching Seth and David, who are both exceptional speakers; very organized, they have this cohesive train of thought, they have a message, they have structure. I have none of those things.

(Laughter)

So, I’m a hacker by trade. By the way, who’s heard me speak before at a business or software conference? Watched the video? Ok a bunch of you. I’ve gotten a little bit better, but not very different. The material is all different, by the way. I’ll try and speak a little bit slower. Well, actually there is… we’ll see. We’ll see how that goes.

We’re going to talk about building software businesses. I put this disclaimer up every time I speak, which is I write code every night; I’m a hacker, I don’t speak professionally for a living. So, be gentle. If you have questions, by the way, along the way, feel free to ask them. One of the upsides to me not having like a consistent string of thought is that you can’t interrupt it. So, just raise your hand and try and get my attention jump up and down or something if you want I’ll just double click on one of the slides and we can dive in.

I picked things out of the last year’s worth of experience based on what I thought would be interesting and that’s not obvious. At least it was not obvious to me over the course of the last year.

Looking back, just one quick thing –uh, two quick things: So, last year I launched my book about marketing. You guys helped propel it; it did really well. It’s still doing very well; number 7 out of - not that I’m counting how many marketing books - I actually wrote a script that does that and tracks my rankings hourly so I don’t have to do it myself, (Laughter) but anyway… thank you for all of you that bought it.

And, I’m expecting my first child in January. My new startup venture; hopefully it will require less capital (Applause).

As Joel (?) mentioned, I write a blog; lots of you read it, I think. And HubSpot is the company – it’s my third startup, and a lot of the stuff I’m going to talk about actually comes out of HubSpot for a couple of reasons. Not- we didn’t invent this stuff, and one of the dangers of speaking and talking about software businesses and startups generally is most people, including me, extrapolate from a data point of one. Which is “oh yeah well, this is how it worked” and “boy isn’t that great” and I’ll share with you that data point of one in terms of stuff that worked for us but at least it’s better than extrapolating from a data point of zero. Right, so we’ve actually tried this stuff and kind of know what’s worked for us or not and you use what works for you.

I put this slide up here a) To brag (Laughter). This is the customer growth chart and if you notice like back in ’07, we were kind of flattish, just getting started. That’s when I first spoke at Business of Software; this is my third year in a row and clearly my presence at Business of Software is doing really well for the business (Laughter), so I hope to get invited back. And this is customer growth, by the way, the revenue growth ramp is steeper, because revenue per customer is growing and we’ll talk about that as far as metrics. I don’t want to talk about HubSpot the Company and what we sell because I’m not salesperson; I don’t sell things. We’re going to talk about the business.

One thing that’s interesting about HubSpot is of the first nine people on the exec team, all of which are still there, or still here – they’re MBAs, including me, including my co-founder, including our VP of Engineering, including our VP of Sales, all the way on through. And so one would think that we were like doomed to failure from the beginning, with that many MBAs sitting in a single startup. And we’ve managed, so far, not to screw it up and we’ll talk about that.

All right, and as I mentioned, all this stuff does not come from us. HubSpot – one of the things I love about working at the company, one of the things I love about the team is we are students of the game. So we know we haven’t quite got it figured out and we know there’s going to be plenty of opportunity to screw it up so we like to talk to as many smart people that will give us the time. These are just some of them. There are lots of smart companies in the world; these are folks that I’ve actually like consumed copious amounts of alcohol with or sat for multiple hours and gotten the chance to tap their brain. And I’ll talk about Drew from Dropbox because he’s the one I consumed alcohol with most recently, and was influential. By the way, how many people use Dropbox? I’m just curious.

So, one of the things that’s interesting to me – this is one of the things that really appeals to me – this is my favorite conference, I’ve said that publicly many many times, is because it’s about the software business. And the operative word there being both software (obviously) and the fact that it’s a business.

And that we are trying to build businesses, not do interesting projects – these are businesses, and it’s ok to talk about revenues and profits and margins and customers and product and those kinds of things as a business. So I’m going to spend a very brief amount of time because I get this question every now and then about venture capital. HubSpot has raised 33 million dollars of venture capital in our last 4 years. And it’s my first company raising venture capital. I’ve been a self-funded bootstrap startup entrepreneur and blogged a ton about why you shouldn’t raise venture capital. Not because it’s evil, which I don’t think it is. But I don’t think it’s necessary for most of you. So if you’re a first time entrepreneur, I’m going to leave this message and we can definitely chat about it over a beer tonight or something like that in terms of when is the time to raise it or not raise it. But the key here is that it’s not necessary.

Too many entrepreneurs get started, like “I’m building a software business; here’s what I want to do, and the first thing I’m going to do is go write a business plan or a PowerPoint deck or do something and then go off and try and raise capital”. That’s a mistake. Because as soon as you try and do that, essentially you shift your mode from solving a customer’s problem or an industry’s problem to solving the investor’s problem. And those are not the same problem. Investors have a very different set of problems that they are trying to solve. So, if you can avoid it, don’t raise capital too early on, especially if you are a first time entrepreneur. We can talk for an hour about just that. And whatever capital you raise, make sure it fits.

There is a reason HubSpot has raised it. Quick question for you guys: How much capital do SaaS businesses raise prior to going public? We’ve looked at all the publicly traded software services businesses, so Constant Contact, LogMeIn, SuccessFactors, NetSuite – all of them. These are software business – hosted software, multi-tenant, doing smart things – they went public so they’re obviously relatively successful. Back in the day, when I did HubSpot it’s like, “OK, well we raised a million dollars of angel capital and I have no idea how we’re going to spend a million dollars of capital, because it’s just the two of us… why does software require that much… like, ok great we’ll just make this last two years and we’ll see if the business goes.” And we raised another 5, another 12, and then all the way up to 33. The answer is 42 million dollars median raise pre-IPO. Not average, but median – across all public and traded SaaS companies. So all these SaaS companies raised a ton of money.

And the question is: well, why would they do that? And the answer is for a SaaS company specifically, where you have a subscription-based model, it takes a fair amount of capital to acquire customers. And the faster you’re growing, so the ones that raise the most and the fastest was salesforce.com and their growth curve is steeper than HubSpot’s. It’s actually the only publicly traded company that’s steeper than HubSpot’s, which I’m proud of.

So it takes money to grow these SaaS businesses because when you’re doing a subscription based model you’re incurring all your acquisition costs to get the customers (sales and marketing, etc.) upfront. And then they pay you over time, usually on a monthly basis. Even if it’s an annual basis. Usually the lifespan for a SaaS customer should be 4-5 years if you’re doing things right. So the reality is you spend all the money upfront and then the revenue comes in over time so essentially what you are doing as a SaaS company is a form of customer financing. And, oddly the faster you’re growing, the more customers you’re signing up, the more capital you will consume, fueling that growth. So that’s one non-obvious thing that occurred to us along the way.

There’s an investment firm out on the west coast called Pacific Crest that did some research that says across about 78 privately held software companies, how much money does it take to get to specific points of growth? And then how much money do they expect to take before they break even? This is about right. I’m sure lots of you have gotten to better levels of revenue without raising this kind of money but this feels about right as a rule of thumb. It’s a great report, by the way. We can talk more about other numbers from that.

So I’m going to go through some very Obasic metrics. Some of this stuff you know, or have heard from me, so I’m going to be very quick about it. It sets the model for some of the things I want to talk about. One is your Cost of Customer Acquisition. And this is your total Smarketing (sales and marketing dollars) divided by the number of customers you sold. And this is all in- so this is salesperson’s salaries, marketing people’s salaries, marketing programs, all advertising, AdWords, the website, all of it - and divide by the number of customers sold. So let’s say you spent $50,000 and you got 1000 customers, your acquisition cost was $50.00. So that’s an important number to know in terms of what it costs you to acquire a customer.

Another important number, which we’ll talk about, is the overall sales velocity. How many new customers are you selling month over month? And what’s the second derivative on that? How’s the growth going? We’ll talk about the way it plays in.

The other number we need to know is the Lifetime Value of a customer. ARPU stands for Average Revenue Per User. Essentially how much money do you make per customer? Let’s say we’re just talking about monthly business. It applies equally well if you are talking annually. So let’s say you’re charging $100 per month and your average customer stays 50 months. Fifty months worth of customer times the $100 of revenue, which equals $5000. So that Lifetime Value is important and the obvious one, which we are not going to get into, is that your lifetime value should exceed your cost of customer acquisition. So if the total money you will ever make on a customer does not exceed the amount of money it took you to get that customer, something is fundamentally wrong.

Now the non-obvious stuff. One is the retention rate. So if you look at what causes a customer to have a lifetime value of x, there are two factors that go into it: How do you charge them per period, and how long do they stay? The “how long do they stay” part of the equation is around your retention rate. Of the customers that sign up, how often do they cancel? What’s the cancellation rate or “turn rate”? And this one’s actually kind of subtle, because different people measure retention rates in different ways. So one way you can measure your retention rate, or the inverse of which is the turn rate is this: Let’s say you turn rate is 3%. That means if you started your month with 100 customers, of those 100 customers, 3 of them will cancel, on average. That’s a customer cancellation rate.

Another way to measure it is revenue cancellation rate, because different customers might pay you different amounts of money. So you might have going into it 100 customers, and the number of ones that cancel are the ones that are paying you the most, let’s say. In which case the cancellation rates are higher than 3% even though 3% of your customers cancelled so on a revenue basis, your turn rate might be higher.

And the last but very important piece is what we are calling, like many people are, is called “discretionary turns.” Discretionary turns essentially is the customers that cancelled that actually had an option to cancel in the first place. So let’s say you go into that month with 100 customers. But only 80 of them actually had the opportunity to cancel because some of them are in 6-month contracts or 12 month contracts or whatever. So just the fact that you kept some of those, you shouldn’t get real credit for because they didn’t have the option to leave. They didn’t have the option to walk out the door. So the discretionary turn is really what you should be watching because that’s the signal that tells you “are you doing something useful? Do people value it? Are they happy or not? So those are numbers that are extremely good to know. And one of the non-obvious things we learned at HubSpot is the absence of turn or cancellation is not the same as the presence of delightedness. So even if they had the option to cancel – they could have hit that discretionary cancel button – “I am out the door, this stuff sucks” – just because they didn’t do it, it means they’ll continue to pay you, which is great, but it does not necessarily mean they are delighted, or happy. And your long term success – low turn rates are absolutely important, but you need happy customers otherwise life gets really hard very quickly because they happy customers are the ones you get the reference and word of mouth. I’m not going to talk about marketing but it’s extremely important so you should be measuring that stuff in terms of how everything from classic customer surveys

You could do classic customer SAP surveys, you could do Net Promotor score, which is a simple two question survey, you could put something in the product like Wufoo does and say “Are you happy?” right inside the product and people could tell you, “Yes, I’m happy”, “No, I’m not happy” and measure that just to kind of get a sense. Just because they’re using the product does not necessarily mean they are happy.

One of the things that was fascinating at HubSpot is all these little tensions that exist within the company. We’re 180 people now; we’ve grown really fast - I think it was about 100 last time I spoke here. I’m going to talk about one of them. There are all these little conflicting forces where you pull on something and something else gives.

So we’re going to look at the three primary things we just talked about: Sales Velocity: How Many Customers Are You Selling Every Month, Acquisition Costs Per Customer Basis and Lifetime Value.

In most cases, if you try and prove one, something else is going to suffer. All other things being relatively equal. So for instance, let’s say we came in and said, “We’re not selling enough customers. We want to drive sales velocity up.” And we’ve done this at HubSpot - we’ve done all sorts of crazy things at HubSpot, and so we can go to the sales team and say, “Oh, by the way, we are going to increase quota and goals by x percent.” We’ll try that and see what happens. And as it turns out, it does work. But multiple bad things can happen. So let’s say we do that and say “Ok, we’re going to sell 10% more” and let’s say we want to keep the Acquisition Cost the same. We’re not going to spend any more for leads - we’re not going to get any more better prospects in the door, better leads in the door. What will happen, invariably, is Lifetime Value will go down because you will sign unhappy customers. Because the sales people are going to be more aggressive, they’re going to do more arm twisting, and essentially you’re going to get less happy customers as an outcome of that process.

Let’s say for instance in that same example, we want to grow sales velocity but we also want to keep the same number of happy customers. We want to leave the lifetime value the same. We don’t want to degenerate that. What happens then is your acquisition costs go up. Because what happens is sales people say “Oh, we need more growth - that means we need more leads coming in at the top of the funnel so we can cherry pick and sell the best customers”. If you want to have happy customers, just give me 500 people to talk to instead of 400 people to talk to and then I can sell more. But the reality is those additional leads are going to cost you money so your acquisition cost goes up. So the moral of the story here is that in most cases, if you’re not very very careful, you will pull on something in the system - there’s this great big system dynamic, where you turn this knob or dial over here and something unexpected happens somewhere else. So, the trick is finding that balance and the balance is very tricky in that there are always little mini subsystems within there. This is just a sales/marketing vs customer happiness vs acquisition cost, but we can take any 2 or 3 variables within the company and what we found is that they’re interrelated somehow. We do something over here and something else happens over there. So you might be asking yourself, “What do we do? I want to improve sales, and I want happier customers, and we want to drive our acquisition cost down.” The cliche but right answer is - invest in not just the product - invest in the experience. And there’s a very good reason for this, and it’s semi-obvious, which is if you invest in the experience, everybody wins. It’s easier for the sales people to sell a better experience. Customers are happier, your Lifetime Value goes up, because they’re going to stay longer, because the experience is better. Acquisition costs go down.

We have 60 salespeople at HubSpot, out of 180. Very sales and marketing driven organization. That’s probably what fueled that growth. We woke up about a month and a half ago, we did some surveys and some soul searching and we said, “Well, this kind of sucks”. And it sucked not because we were not selling - we like our sales people just fine. We want to build a multi billion-dollar business. The path that we were headed on was going to create a 250 million dollar business, a 500 million dollar business, not something exceptional that our grandkids were going to talk about some day. So we made a radical change.

Up until last month, HubSpot would hire 3 new sales reps a month to drive the sales velocity, to drive the sales growth - which required marketing spending to drive more leads and produce content. We put that to zero and said “we are not going to grow sales and marketing anymore. Period. We’re going to take all the cash we would have spent on sales and marketing, and we’re going to pour it into product and into experience. And we think that’s the right thing to do. We had to convince a 60 person sales team that we’re not growing sales/marketing. We’re not going to grow marketing the company, the board, the investors - a bunch of people. We’re going to take a hit next year in terms of revenue projection. The idea is invest in the product because it works and because it’s the one thing that essentially you don’t get those tradeoffs in terms of other things within the system breaking. The other thing that was not obvious to us was there is a difference between making customers happy and making happy customers.

So, the making customers happy. I had a company meeting about a week ago where we announced some of this new news and what I said was that, we don’t want to focus on making customers happy, because what that connotes is, “well, ok, sales and marketing does this over here, and then some number of customers shows up - we have 3200 of them now, and then it’s product and engineering and support and all those folks that are then ‘responsible’ for making the customers we have happy.” That is not the right answer. The right answer is the entire purpose of the business is to produce happy customers. That’s the output. It’s not something you do after the fact and say, “Oh, we’ve got these customers - now what do we do to make them happy and keep them happy?”. It starts from first exposure - it starts from marketing, all the way on through sales and everything. And so everybody in the company needs to be thinking about, “Is what I am doing contributing to the raw goal of the company?” - which is to manufacture happy customers. Don’t think about customer happiness as a subsequent thing that product and support worry about. Everybody should be thinking about producing happy customers.

At HubSpot, we have a bunch of these little business hacks - tricky little things that we do that we look back on and say “wow, that was kind of smart of us - that was clever”. This is on our top 5 list. We have a number at HubSpot called the Customer Happiness Index (CHI). And we’ve had it since month 3, so we came up with it relatively early on. It’s a geeky way to measure how happy customers are. It’s a number from 0-100 that measures the probability that any given customer, given the option to cancel, will still be a customer next month. So we can go through all 3200 customers and we measure the happiness index. And the reason this is important is not because it’s important to know, and that is important, obviously, the number is immensely valuable, and we can talk about all the ways that HubSpot uses this one number. But the biggest value of CHI, is its simplicity. The fact that it’s a single number that ties to not profits, profits would be great, right, you want financial numbers. But it’s hard to hug a dollar. It’s hard to get employees all riled up and say, “Yes, I want the P&L to go up by 7% next month or next quarter.” Yes, they need to care at some point and we’re all, in a positive way, red-blooded capitalists. But the nice thing about the Customer Happiness Index is we can look across groups and say “Oh, by the way - you’re the 60 sales reps, you’re the new people, you’re the ones that have been around for a while, and we measure the average customer happiness index for every single sales rep. Ok, are you selling happy customers?” If you’re not selling happy customers, you’re doing something wrong. Your job is to produce happy customers at the sales point all the way through.

We look at marketing channels. When we sell through inbound lead generation through our blog, if we get a customer through that channel vs that channel, does that produce happier customers or less happy customers? We look at our support team. If someone talks to these three people vs those three people, are they more or less happier? And the idea is to have this single number that you can adjust over time because what goes into the number changes probably about every 4-6 months.

The three that it boiled down to for us was:

1. Frequency of use. If they used the product every day, every week they were more happy than if they were just using the product every two months.

2. Breadth of use. How much of the product are they using? Is it just one feature or are they using seven things?

3. Sticky features. This was the key one. There are certain features you will find that have an exceptionally high correlation to happiness that says if people use this feature, even if they log in only once a week, they behave as if they’re logging in 17 times a day. They have the same pattern. There’s something about that particular feature that causes them to stick. And the weird thing is you won’t know what that feature is. Your product management group won’t know - you won’t know until you actually sit down and measure it. My advice is, even if it’s coarse, you’re logging all this data anyway - try and measure it and try to get better over time. It works wonders across the company. If I could point back to one thing that says what made HubSpot tick, this is way way way high on the list. So, I encourage you to do that.

The other hack that we did. My first start up, we had this at all our management meetings and founder meetings. We had an empty chair in the room - the designated chair for the customer. And we would literally pretend there was a customer in that chair when making decisions. And so, ok, if we came up with something - like David said “if the nickel stands right on it’s edge and you have to make a choice, how do you decide which way you’re going to fall?” Because we make these decisions all the time - they’re non-trivial decisions. Do we raise prices or lower prices? Do we do this feature or that feature? I found it very helpful in the first start up to actually have that chair, as if we had a customer here who was savvy, who we trusted, who let’s say had a stake in the company, what would they say? What would their vote be?

And so at HubSpot, we took this one step further. (Laughter) We actually have a stuffed bear; her name is Molly. Our marketing persona is called Marketing Mary and we have Owner Ollie and she is Molly. She goes to all board meetings, all management meetings, and any other meeting that someone wants to invite her to. She is required to attend board meetings and management meetings. Not a single meeting will go by where someone will not say, “That’s bullshit. What would Molly say?” It sounds cheesy but if you think about it, you can have really smart people and debate things for two hours and it becomes crystal clear sometimes that yeah, there’s nothing in it for the customer. Molly would vote no on this particular thing. If we’re evenly split, let’s go with the customer. So that hack - turns out it works. It’s a very simple thing to do. We like it. I’m not suggesting that you give customers some sort of veto right. You’re in the software business. Part of what you deal with is that the customers are often very very good at identifying their problem, not necessarily good at identifying solutions for those problems. So, I’m not suggesting they have veto right, but they - just like everyone else on your management team - they are going to be wrong, they are going to be opinionated. Pretend like they are actually there. What would they say? At least let them be heard.

The other thing that we’ve learned is this. Most things include batteries these days but I grew up in a time when that was not the case. So you would get a gift on Christmas Day, and you’d open it and you’d be all all excited and the thing didn’t have batteries included. So that moment of happiness that was possible just doesn’t happen. It’s like, “wow, crap, that kind of sucks”. And I’m from India and so we don’t buy batteries. It’s like, the answer in an Indian family is always that there are always batteries somewhere. You just have to look hard enough to find them. We don’t buy new batteries, which defies the laws of physics because someone has to buy them at some point but anyway... My mom’s answer is “there are batteries in the house somewhere; don’t buy new batteries.” But the lesson here from a software business perspective goes into this notion of services. So I may, deep down inside, however many layers you look, I am a product guy. I just am. And there’s a very simple reason for that. The margins are better. I can write a piece of software one time, sell it to 1000, 10,000, 1,000,000 people and my cost of delivery is relatively low. You guys all get this, right? It’s simple! That’s why we don’t like services. If I had a choice between the two, I’d sell product because the margins are great. One thing we have learned is that I think services sometimes get a bad reputation. I’m going to give you some anecdotal evidence here. So, let’s assume right now that HubSpot is measuring, which we are, CHI for customers, so we know what their happiness is. We don’t have to wait for them to cancel; we can actually tell you with relatively good precision, not only how many customers are going to cancel next month based on the patterns of using the software, but which ones they are. Like, “Oh, you have a CHI of 22. You don’t know this yet, but you’re unhappy and you’re going to cancel 14.2 days from now” or something like that. (Laughter)

Services represent 7% of HubSpot’s revenue. And it’s a break-even unit within the company. So we don’t try to make profits, and we don’t try and lose money. We essentially solve it for break-even. But a very interesting thing happens when you look at services from a software business perspective. Here’s what happened at HubSpot. So we’re like ok, well we don’t really like services all that much - it drives the margin down because on some portion of our business, although it’s relatively small, we make zero margin and that, if you average out, is our gross margin for the entire company goes down as a result of having some portion of our business as 0%. As it turns out, that was the wrong way to look at it. And here’s why.

The way we looked at it was - “Well we charge this much - we charge I think it’s $125/hr for our services people”. Right, so we don’t give away services for free and they help train onboard customers and bring them up to speed. And a customer will spend between 4-8 hours with a service person at HubSpot. It’s paid support, essentially. And, at first we thought “oh, it’s a break even business” because we can look at the $125, we know what our fully-loaded costs are, we know what the employee salaries are for the people that work on that team, and we’re like “Oh, it’s break even”. As it turns out, it’s not break even. Because what it doesn’t capture, the “Oh, this is the revenue coming in the door,” this did not capture the increase in Lifetime Value. Because we did the research. We sat down and looked at our data and said, “Oh, you know we’re going to spend a month or two where we don’t provide any kind of on boarding services”. We’ve got all this documentation, but let’s see what happens, because before, every single customer that signed on at HubSpot would have some human help them for between 4 and 8 hours and it was sold as part of the product. And so we retracted that for a while and said “Let’s see what happens if we don’t have services.” As it turns out, absence of services led to much unhappier customers. That seems reasonable. It’s like, “Ok, well lots of people don’t know what they are doing, this inbound marketing stuff is new, the product’s not that easy but we try”. And so it turns out though we measured the actual happiness index lift, which we know is correlated to turn, which we know how to calculate the economic value. With every hour that we spend on services, we know the increase in Lifetime Value. That says these customers are now going to say 7.2 months longer as a result of their increase in happiness as a result of us having spent the time. We have the data. And so then we took it the other way. It’s like, “Oh, we’ve been spending 4 hours per customer. What happens if we increase it to 8 hours?” Are customers even happier? The answer is yes. The more time we spend it seems that they are even happier. And obviously there is a limit to this. I’m not suggesting that you spend an entire lifetime with the customer. There is a point at which that system breaks. But the larger message here is question the assumptions around people.

Question from the Audience: Inaudible.

We tried that too. And yes and no. So we tried it and we almost decided to do it. The question is: is it so valuable that you should just give it away for free because of the increase in Lifetime Value? So, when we have these consulting sessions, we have 4 hour sessions that a very very smart human on our end talks to the customer and gets them up to speed on marketing and the software and things like that. What we learned was our hit rate of actually scheduling time with the customer went down when it was free. Because they didn’t value it. If they paid $500 for 4 hours of consulting, by God they were going to consume their 4 hours of consulting. So the way we look at it, is that anything we can do to guarantee ourselves that they will actually take a benefit of the services, we are all for that. It’s worked very well for us. By the way, I’m the type of person - I don’t like humans all that much. If there was a way to build a multi-billion dollar business out of my basement, not hire anybody ever, I would do that. As it turns out, that’s really hard (Laughter). I’ve tried. It’s really, really hard. It takes people.

Once you have this Customer Happiness Index, by the way, then you can run lots and lots of different experiments - some of which we talked about. You can also say, “Well, what happens when we go to, instead of having this one on one consulting, what if we go to like some online chat-based, video-based, content-based model? What impact does that have and we can kind of calculate.” It’s like “Oh, it’s going to cost us $50,000 to produce this video or do this thing.” And we can actually measure true ROI because we know relatively quickly within a week or two, what the impact was on happiness, which is once again, correlated very very well with Lifetime Value.

Question from Audience: Inaudible

Very Positive. So, it’s interesting. I was dubious, by the way on this particular experiment. I thought there is now way that humans are going to sit and watch something vs actually talking to a human. The sample size is not large enough for us to have confidence in it yet, but the early data suggests that the Customer Happiness Index for those that go through that One to Many process within one customer segment is actually marginally higher. And we tried to dig into why that is because it makes no intuitive sense. It’s like, “Why wouldn’t you want to talk to a human if you could?” But so far, it’s positive. It’s working out. Only within a certain segment, but it’s working. So we’re going to invest more. The other thing that works is this. Let’s say you have this CHI and you knew exactly which customers were going to cancel, and you knew that if you could keep those customers – their Lifetime Value is, let’s say in HubSpot’s case $20,000-$30,000 – call them. And say, “Hey, I think you’re unhappy. What can I do to make you more happy?” And that is essentially the script. We have an entire team of people at HubSpot called Customer Success Managers that do nothing but run the report, look at the bottom lowest 2 customers and call them and see if they can convert them. Like, “It’s clearly our fault. What did we do and what can we do to help?” And we’ll do things like give away another 4 hours – we’ll do all sorts of stuff to make a customer happy because we know what the value is. And the question you would ask if I weren’t talking so fast is, “Oh yeah, but those customers that you save- do they ultimately end up cancelling anyway?” And the answer is yes, about 1/3 will cancel because there is something intrinsic about that relationship that just wasn’t working, and just us calling them and making them happier is sometimes just temporary but in other cases it works so it is still profitable.

Question from the Audience: Inaudible

Yes. Great Question. The Question is, “by not investing in the sales team, doesn’t the overall experience get worse because you have fewer sales people?” We have a great consultative, relatively sales process. My answer is that nothing at HubSpot or in any company, is forever. Everything is one grand experiment that we happen to be this far along in the process at a particular point in time. So our decision to stop hiring sales reps and investing it all in product, will endure for at least 6-9 months. That’s the current plan. And then well look at the numbers. We have certain goals that we want to get to in terms of customer happiness. And once we get there, then we are kind of like “Ok, tweak the engine. The car is doing relatively well now. It’s not shifting as much anymore. Let’s go faster.” And then go back into sales and marketing mode. So it’s that balance. And it’s like every quarter there’s like a little thing like, “Oh, we did this over here and this broke over there. Let’s go fix that.” So it’s this kind of iterative optimization process. So I fully expect that we will go back into getting more salespeople and invest more there.

Question from the Audience: Inaudible

Because we’re geeky. And because we don’t like multiple variables. We don’t like two experiments at the same time that might impact each other because we’re so smart that then people pick whichever experiment and data that they like that kind of validates their thinking. And we like to point to it - it’s like, “Oh, if this is the only thing we changed, and life sucks,” clearly there’s got to be some correlation. It’s not always definitive but …

Question from the Audience: Inaudible

So, the question is - HubSpot’s got a bunch of cash in the bank. We’ve raised a bunch of capital. And doesn’t that give us the opportunity to run more of these tests and do more of these experiments? And the answer is yes, that’s one of the upsides to having capital. It’s hard as a bootstrap to run a lot of tests, because you’re looking for revenue – you’re looking for customers. You can’t say, “Well, we’re going to turn off the revenue spigot for two months and see what happens, because we’re curious and we’ll see” As it turns out, employees don’t like that too much sometimes. (Laughter) I’ve done that before in my prior startup. So yes, the cash does help there. So my message to you on the capital raising is that if you have relatively clear, precise visibility into your funnel – into your overall business process and what the economic drivers look like…

For instance, we can tell you - here’s how much we pay a sales rep, here’s the month that we will become cash flow break even because we know how much they sell, we know what the customers are worth. And as the data grows, we become increasingly confident. It’s a very predictable business. So if you look at that curve, that curve, the sales curve I showed you? The reason it’s so smooth is not an accident. It’s because we solved for that curve. It’s like, “Ok, we want revenue to be ‘x’ next month, and the month after that, and the month after that.” And we tweak the business to get to that curve. And so, if you have a business where you know that pouring a dollar into the business from a sales and marketing or whatever perspective, yields $2.00, $3.00, $4.00 of lifetime value – raise money. Just enough to run the experiments that you need to because you should be pouring more water into that machine. You’re producing cash. Investors love that. (Laughter). If you can put a dollar in and get three dollars out, that’s a perfectly good reason to raise money, by the way.

Cathy ____ gave a brilliant speech at a presentation last year in San Francisco, and the one thing she said which resonated with me because I think it happens to be true, is that we shouldn’t think about being producers of ‘x’, we should be thinking about being producers of brilliant users of ‘x’. So, let’s use HubSpot as the example. So I would say, “HubSpot – we don’t make marketing software. We make marketing superstars”. Her example was if you’re a digital camera person, you don’t make the best digital camera, you make better photographers. And it seems squishy. It seems like, “Well, yeah but don’t we really just produce software and sell that?” Yes you do, but as it turns out, as a kind of motivating, aligning, sounds philosophical… it works. Because it’s that kind of customer alignment – the software is the vehicle. Seth said this - “It’s not about the code. The code is not the point.” The customers are the point. The market is the point, essentially. Like, “What are you doing to produce better users of ‘x’”?

So we want to produce a million better marketers, essentially. That’s our mission – that’s what we want to do. Software is how we get there, but that’s what we want to do.

The other thing that we’ve learned is this notion of “simple. So, when we started the company, our whole idea was to have this kind of simple, easy and integrated platform for marketers, because there were much better products and each are individual. For example, we have a content management system. Wordpress is much better. We have an analytics tool. Google Analytics is much better. For everything that HubSpot does – and we have like 19 features – there are venture backed and in some cases publicly traded, phenomenally successful, great companies doing just that. And you would think it is completely idiotic for any entrepreneur worth their salt to ever do something like that. It’s like, “Why would you do that? Why would you have something that competes with Wordpress and Google Analytics?” All together of all things! And the answer, actually, is inspired by Apple.

___________, from Harvard Business School writes about this a lot. But the idea is that if you’re going after massive opportunities, you should not be trying to take market away from your competition. If the opportunity is big enough there are enough non consumers out there that you should be selling to. Look for the blue ocean. Pick your cliché or phrase of choice, based on which business school book you read. (Laughter) But the concept is actually very simple. So, what Apple did was – when Apple released the iPod, they did not say, “We’re going to create the best mp3 device with the highest gigabytes of storage, with the best cost performance ratio”. They said, “We’re going to go after the non consuming mere mortals who are not enjoying digital music but should be.” And Apple has been brilliant at this for most of their entire history as long as Jobs has been in charge. Apple asked themselves a question: “What do we have to do get those millions of people that are sitting on the sidelines that should be enjoying digital music, because it’s a better way to enjoy music – what do we have to do to get them into the game?”

And as it turns out, more often than not, when you ask yourself the question, “What do you have to do?”, the answer is not “build a better ‘x”. The answer is “build a simpler ‘x’”. What’s keeping people out is not some feature. What’s keeping people out is because it’s too hard to get into the game. So Apple said, “Oh, we’re going to build a simple device. We’re going to have partnerships with the content producers. We’re going to have this network essentially. We’re going to have this way you can download song, we’re going to take out all the copyright and we’re going to do this. And it’s going to allow millions of people to enjoy digital music.”

And so, as you go back and you think about your businesses, I think that in just about every industry there are always opportunities – blue oceans of un-served customers that should be enjoying whatever you have to offer but aren’t yet. And that’s a much happier market to work in. It’s frustrating sometimes, but it’s a much much happier market to work in. So I would suggest that you think about that, like “What can we do to simplify?” Like, Southwest didn’t go after people that were flying on Delta. There are all sorts of examples of great successful companies that essentially went after a broad, entirely new market and took new people and got them into consuming whatever it was they were offering.

The other thing we’ve learned at HubSpot. This is a culture hack. Transparency. A short story: About a little over a year ago, my co-founder and I were chatting like we do ever now and then. And we said, “Ok, we’re growing – I think we were about 70-80 people, and we should see whether the employees are happy. We do customer surveys all the time. Let’s check in with the employees”. We had never done that before. We’d never asked anybody at the company, “Are you happy?”

And so we did. And we said, “Ok, well let’s go do the employee survey and let’s ask people.” We did a Net Promoter Score which is essentially 2 questions: 1) on a scale of 1-10, would you recommend HubSpot to a colleague? Would you recommend that they work here? And 2) Why? Which is the qualitative, subjective side to it. So we learned two things:

1. Employees were happy. They were exceptionally happy. And one of the things that bothered us, quite candidly, is that our employees were happier than our customers. Hence, this “take dollars out of sales and marketing and put them into product and create happier customers”. But the employees were really happy and the answer to the question of what made them happy was – the other employees. Like, “I love the people that I work with. They’re really really smart, they care”. All those kinds of things that sound cliché. And that’s not the point of the story. The point of the story was that a little lightbulb goes off with my co-founder and I and we were like, “Oh! We have a culture!” That was the first time the word “culture” had ever been mentioned in the history of the company – ever. It had never been spoken before. It’s like, “Oh we have a culture and it sounds like it’s pretty good. It’s working, people like working here and we’re producing revenue.” And our whole job, essentially, is to try to not screw it up – like HubSpot’s doing well, let’s try and manage not to screw it up. And one of those ways not to screw it up, is – we’ve got this culture. We probably should try and do something to preserve it. We’re like “What is it? I don’t know!” We had never dealt with this before. And since I’m the one that likes people the least, I was the designated person to figure it out (Laughter) in terms of employee culture and human interaction.

So went and asked people and one of the things – this has worked really well – and we’re big on this one – is transparency. So we identified our cultural attributes and I’m not going to bore you with all of them. One of them is transparency and it’s on the list of “things”. We are transparent to a fault. Especially within the employee base. So every employee at HubSpot – and we used ______, by the way. We have like 4,000 pages and tens of thousands of comments. Every day, every employee is on the Wiki at HubSpot. But the information that’s available on the Wiki is how much capital we raised, what price we raised it at, what the right price was, how much cash is in the bank – literally, the bank balance of the company, how much money we burned last month. How long we will last. How long is the runway? Everything is there. Everything we present to board meetings. All the things investors know, every single employee up and down the chain knows that at HubSpot. The only thing we don’t share is salary information of the employees. Absent that, just about everything is open.

Question from the Audience: Inaudible

We like employees to use their discretion. We’re not thinking like a public company yet, so we probably share more stuff than we should which is ok. We’ll probably have to change that some day. But there’s no formal policy that says, “Here’s the stuff you share, here’s the stuff that you don’t share”. Except I think the board meetings. I think there’s something like if 5 years from now, we go public, the board meeting minutes go into the IPO docs or something like that but I think other than that most of it’s relatively fair game. But they use their discretion. It’s like, “Ok, if you think it will help, and it’s germane to the conversation then it’s ok.”

That’s been very helpful for us for a couple of reasons. One is a quote that our VP of Engineering has used in the past, which is “Light is the best disinfectant.” As it turns out, management, broadly, including me, does much fewer stupider things when those stupid things are publicly accessible to everyone. Really stupid stuff happens behind closed doors. You make all sorts of decisions, like “Oh, we’re going to do this, we’re going to change this”. And we tried this, by the way. You would think we would learn by now. My co-founder and I will put an article out there, “We met the management team, we had this long all-day offsite or whatever, and here’s what we’re looking at”. And we’ll have 8 pages of comments within 3 hours. Like, “That’s the stupidest thing we ever heard” kind of comments, essentially.

Question from the Audience: Inaudible

Yes, I like to jokingly say when we initially introduced transparency as one of the things, it was because not being transparent… I call my co-founder lazy for not being able to make stuff up. And transparency actually consumes much less calories. Because then you don’t have to decide, “what do we disclose or not disclose?” Just put it all out there – we’ll work it out.

Along the same lines in terms of culture, one of the hacks that we put in last year, which is controversial….

So we had this meeting of the exec team at HubSpot and we were 80-ish people and we didn’t have a number of things at HubSpot. We don’t have a director of HR or anybody with the word “HR” or any kind of creative title. Nobody responsible for employee happiness at Hubspot. Yet, we were voted best company to work for in Boston. We beat Google this year. So something’s working.

One of the things we did last year was a culture hack. So, we had this meeting and our CFO comes to us and says, “Guys, we need a vacation form and a system to track because nobody knows how much vacation time they have. Whatever it needs to be is fine. We can keep it simple”. So we just looked at each other and were like, “Well, why do we need to do that?” And he said, “Well, you know, because employees need to know”. And so we decided our vacation policy at HubSpot literally is we have no vacation policy at HubSpot. We don’t track it, nobody approves it. You take the time you need and that’s it. And our hope is in both directions that people don’t abuse the system. And so the common argument that comes back is “My God, that will never work” Ok, if you’ve got people that you’re worried are going to abuse the no vacation policy policy, you hired wrong. Fix it. My hope is that doesn’t happen.

Who watches Mad Men? Great show. Those who are not, you are missing out. You should watch it. Go back to Season 1 and work your way through. So Mad Men is set in the 60’s about a Madison Avenue firm. It’s obviously a bit of a caricature of those times, but we can’t believe they ran businesses that way. Drinking vodka in the afternoon and mistreatment of women in the workforce, and just all sorts of stuff. And we look back on it and it’s like, “My God they were idiots. How could they not have known?” My question is – 10 years from now, if someone did a documentary on businesses as we are running them right now, what will people make fun of, then? What are the things we are doing now that are going to look idiotic 10 or 20 years from now? Because we’re hoping to build a business that outlasts us, essentially. That’s the goal. That will be around after we’re dead. And so we want people to point back and say, “Well at least they questioned it, if nothing else.” And we still do stupid things. Some of them deliberate and conscious. So that’s the no vacation policy policy. And we’re still alive, by the way. We’re still making our revenue numbers, no one has abused it. I’m still standing. I still have a job.

Question from the Audience: Inaudible

Very good question. Because we haven’t been able to come up with “What’s the upside”. So, like on the employee transparency – I can relatively pretty well argue why it’s important for all the employees to know essentially what’s going on. Because it makes them better decision makers, makes them feel more bought in. I’m not sure that, as a red-blooded capitalist where the upside of sharing it publicly is worth it. But we do take our customer numbers and essentially our revenue numbers are out there. We have our big customer conference tomorrow so we’re pretty transparent but just not to the same degree. But that might change. We’ll see.

Let’s talk about Free a little bit, in terms of Freemium. It’s all the rage in the software business. And if you’re doing a Freemium model, by the way, don’t forget the “meium” part – it’s not just about the “free”. (Laughter)

I want to just say one quick thing about Freemium. HubSpot doesn’t have a classic Freemium model, but we have lots of free stuff – content free tools, etc. but it’s not the core product – yet. But in talking to a bunch of entrepreneurs, which I do a fair amount, one of the things that troubles me is that one of the traps that we fall into as business people is that once you have a Freemium, when you’re making decisions, you start talking about these kinds of “triggers” and “traps” and “What can I do to cause a higher percentage of people to move from ‘free’ to ‘pay’?” And that’s a legitimate question to be asking – “What can I do to make more money?” Like, “Oh, only .2% of our customers are paying and the industry average is 2.2%. How do we make that better? And that’s ok. What’s not ok, though, is the way in which you frame those decisions. So it should not be “Where can I lay these little triggers, these little wires in the jungle – oh, I was doing this and now I tripped – and now I’m a paying customer, I have to be”. The idea is not to trip the user base. The idea is to create or manufacture the value in a way that your customer triumph results in them switching. And this applies to upgrades as well.

This is going to sound philosophical but there is a difference between laying little trip wires in the sand, like “Aha, we got you! You were this and now you’re that and you need this feature”. The company that I think has got this is – and I love the company - salesforce.com. salesforce.com – brilliantly successful. My hope is that we don’t have to this to be brilliantly successful. That remains to be seen - but they are diabolical about those traps and trip wires. So you can start as a salesforce customer paying $500 a year or something crazy like that and then all of a sudden you wake up one day and there’s this big ass non-linear shift. It was not an accident, by the way. As you were meandering through the woods of salesforce usage, and then you fall over this one little thing, and now all of a sudden you’re paying $20,000. It’s just crazy. They’re diabolical. My suggestion to you is you don’t have to be that. You should be thoughtful in terms of where you know you’re creating value and kind of associate the price the customer pays for the conversion to paid.

So, I’m not a “brand” guy, but I like this quote I heard at a conference at MIT of some sort and it was a table away from me so I can’t attribute the source, but it’s about a brand is what people say about you after you leave the room, essentially. That’s like the layperson’s attempt to describe brand. And where it helps is it makes everything else easier. Like Dropbox. I asked Drew, by the way. He was in town last week. He’s one of 5 people - I will cancel dinner with my wife in order to have dinner with Drew from Dropbox. (Laughter) And my wife knows it and she encourages it because she’s a user and she’s like, “Well ask him why they haven’t built this feature yet – why can’t you share folders?” Which I did, and they’re coming, by the way, for the record. (Laughter) You didn’t hear that from me - technically that’s still confidential. (Laughter) So I asked Drew, and I’ve asked him this before, which is “Drew, I totally get that the reason Dropbox is so phenomenally successful is the product.” Because he’s told me this 100 times. “Dharmesh, it’s the product. Build a product.” So I asked him this time, because I’m slightly smarter now, “Drew (and I’m very crafty in the way I structured this question) next to the product, what’s the next most important thing that contributed to your success?” And his answer was, “Don’t screw the customer”. That’s it. When they sit down and make decisions, Drew says, they do not make decisions where the company benefits and the customer suffers. That’s it. Don’t do those things, essentially. After you get the product right, then secondly, essentially, solve for that customer happiness. It sounds squishy but it works.

How am I doing, by the way? (Applause)

So, the “be a good egg” thing is around what I call the “path of truth and justice”. So at HubSpot we believe we are on the path to truth and justice because we believe in this inbound marketing and stopping SPAM and direct mail and killing trees and harming kittens and all those things. (Laughter) And it’s true. So we really believe we’re making the world a better place. But I’m going to pause it to you that today versus the 80’s or 90’s- if you were in the software business, it was sort of ok (not ok as in ethically ok, but profitable) to be somewhat evil. Like Oracle (Laughter), a bunch of relatively successful software companies. My apologies if someone from Oracle is in the room. But – supremely successful software company – and it worked and the reality is you had all sorts of kind of misbehaviors because the market didn’t punish bad behavior that well because we didn’t have an opportunity to. So you had drive-by sales, essentially, like “Oh, yeah, here’s a $600,000 _____implementation or whatever that never saw the light of day” and very aggressive sales, lots of bad things. And my argument to you now is that if you’re really looking to build the next multi-billion dollar business, bad behavior gets talked about now and it will crush you. Becaue of the Internet. People can search on “HubSpot sucks” in 30 seconds and find out how many people think HubSpot sucks. You can’t hide anymore. Customers don’t have to go to a conference to find out, “Oh yeah we tried that product from that company and it kind of sucked”. It’s all open right now. SO I think the red blooded capitalist, right thing to do, is to put yourself on the path of truth and justice and solve something where you can say, “Well I’m actually solving a problem. My customers are happy. I care about that. And my hope is that that leads to a multi billion dollar company some day”. My answer is that maximizes your odds. If it were me, that’s what I would do.

Question from the audience: Inaudible.

Yes, this question is about salesforce. What about salesforce? Of all the things that keep me up at night at HubSpot, high on my list of questions that keep me up at night at HubSpot is the “What about salesforece?” Not from a competitive perspective. So if you look at the practices of salesforce – I talk abou their pricing and it’s clever and diabolical and whatever. (Laughter) I met with at least half a dozen people from the original executive team at salesforce. Sat down and talked to them and said, “Oh, yeah, what did you guys do about this?” They are very transparent as it turns out. Very open company. But there’s a bunch of stuff at salesforce that I just fundamentally don’t agree with in terms of corporate culture and aggressive sales tactics and all that kind of stuff. They built a great product and a big business. I wish them all the success because they did a great damn job and laid the groundwork for a lot of us. My hope is the successful software businesses of the next two decades will be kinder, gentler, and more focused on customers. So I’m going to close on this note, which is, as a former bootstrap entrepreneur (this is my third one), is… and there’s been lots of discussion around “Should we take venture capital? Should we dream big?” My response to you is that dream big and execute small. What I mean by that is this: If you are starting a company, for those of you who are entrepreneurs in the room – if this is your first one, it will not be your last. It’s a genetic flaw and you’re going to do it over and over again. (Laughter). And the way to think about this is that your big dream does not have to be embodied in your current company. For instance, it’s completely ok to say, “Oh, I’m going to do this bootstrap startup. Someone is going to offer me 15, 20, 25 million dollars. I’m going to take it.” And there are lots of people who argue, like “Oh, you didn’t dream big enough and you should have held on and it was growing and why not…”

Take the cash. (Laughter) Take the cash and here’s why: Because the cash funds the next dream. And it’s ok. You will have plenty of ideas, I promise. Your issue is not that you don’t have ideas. Your issue is you have too many. And it’s hard to tell the crappy ones from the potentially good ones or the great ones. I’m going to close, take a breath and I’ll take a couple of questions until Neil pulls me off the stage. Thanks for your time, by the way. Always fun.

Ok, two questions.

Question from the Audience: Inaudible

The questions is this: We have this customer success group that calls customers that are low CHI, so we how do we track the data. We’ve got about 18 people out of MIT on the team – we’re very data geeky. So everything that happens, essentially we try and capture so we can analyze turn and things like that so we know that, “Ok, so the happiness of someone that we kind of “re-happified” or “re-delighted” even though they weren’t, has this kind of behavioral pattern, so we just measure it. And so it’s still profitable which is why _______. That team is still growing, dollar in produces more than dollar out which is a good thing for us to do. But it’s not as good as we thought it was because there are some intrinsic issues . Like, there are some customers that just don’t fit the profile. Like, no matter what we do, there is a reason they are unhappy. Some of it’s us and we can fix those things, but that’s not the majority of the reason. So we have about a third-sh of them that we can save, but it doesn’t pan out. There will be others unhappy again in 6 months or something like that. We’re trying to figure out now from a demographic perspective, “What’s the proof? What did those customers look like?” Even though they had a low CHI, they are not worth trying to save, essentially, because we’re just not the right fit is what it comes down to.

Question from Audience: Inaudible

It would be. And should be. The question is, “Why talk about average revenue per user and not average profit per lifetime or profit lifetime vs profit value?” And we do. So the answer is, you should definitely look, if you can, at lifetime profit. Because then you can factor in cost of goods sold. It’s like, “Ok, well here’s what goes into it”. So that’s the ideal number that you should be measuring. We use proxies for that. And revenue is good enough for us and we’re not profitable yet. We will be here. And the other thing is that with a software company, the cost of goods sold ends up being not that big a piece of the equation overall so it’s a relatively ________.

Given how much we talk about it, it's surprising that there's a lot of confusion about what quality is.

What's a higher quality car: a one-year old Honda Civic or a brand new top of the line Bentley?

It turns out that there are at least two useful ways to describe quality, and the conflict between them leads to the confusion...

Quality of design: Thoughtfulness and processes that lead to user delight, that make it likely that someone will seek out a product, pay extra for it or tell a friend.

Quality of manufacture: Removing any variation in tolerances that a user will notice or care about.

In the case of the Civic, the quality of manufacture is clearly higher by any measure. The manufacturing is more exact, the likelihood that the car will perform (or not perform) in a way you don't expect is tiny.

On the other hand, we can probably agree that the design of the Bentley is more bespoke, luxurious and worthy of comment.

Let's think about manufacturing variation for a second: Fedex promises overnight delivery. 10:20 vs 10:15 is not something the recipient cares about. Tomorrow vs. Thursday, they care about a lot. The goal of the manufacturing process isn't to reach the perfection of infinity. It's to drive tolerances so hard that the consumer doesn't care about the variation. Spending an extra million dollars to get five minutes faster isn't as important to the Fedex brand as spending a million dollars to make the website delightful.

Dropbox is a company that got both right. The design of the service is so useful it now seems obvious. At the same time, though, and most critically, the manufacture of the service is to a very high tolerance. Great design in a backup service would be useless if one in a thousand files were corrupted.

Microsoft struggles (when they struggle) because sometimes they get both wrong. Software that has a user interface that's a pain to use rarely leads to delight, and bugs represent significant manufacturing defects, because sometimes (usually just before a presentation), the software doesn't work as expected--a noticed variation.

The Shake Shack, many New York burger fans would argue, is a higher quality fast food experience than McDonald's, as evidenced by lines out the door and higher prices. Except from a production point of view. The factory that is McDonald's far outperforms the small chain in terms of efficient production of the designed goods within certain tolerances. It's faster and more reliable. And yet, many people choose to pay extra to eat at Shake Shack. Because it's "better." Faster doesn't matter as much to the Shake Shack customer.

The balance, then, is to understand that marketers want both. A short-sighted CFO might want neither.

Deming defined quality as: (result of work effort)/(total costs). Unless you understand both parts of that fraction, you'll have a hard time allocating your resources.

It's cheaper to design marketing quality into the product than it is to advertise the product.

It's cheaper to design manufacturing quality into a factory than it is to inspect it in after the product has already been built.

These go hand in hand. Don't tell me about server uptime if your interface is lame or the attitude of the people answering the phone is obnoxious. Don't promise me a brilliant new service if you're unable to show up for the meeting. Don't show me a boring manuscript with no typos in it, and don't try to sell me a brilliant book so filled with errors that I'm too distracted to finish it.

There are two reasons that quality of manufacture is diminishing in importance as a competitive tool:

a. incremental advances in this sort of quality get increasingly more expensive. Going from one defect in a thousand to one in a million is relatively cheap. Going from one in a million to one in a billion, though, costs a fortune.

b. As manufacturing skills increase (and information about them is exchanged) it means that your competition has as much ability to manufacture with quality as you do.

On the other hand, quality of design remains a fast-moving, judgment-based process where supremacy is hard to reach and harder to maintain.

And yet organizations often focus obsessively on manufacturing quality. Easier to describe, easier to measure, easier to take on as a group. It's essential, it's just not as important as it used to be.

The happy theory of business ethics is this: do the right thing and you will also maximize your long-term profit.

After all, the thinking goes, doing the right thing builds your brand, burnishes your reputation, helps you attract better staff and gives back to the community, the very community that will in turn buy from you. Do all of that and of course you'll make more money. Problem solved.

The unhappy theory of business ethics is this: you have a fiduciary responsibility to maximize profit. Period. To do anything other than that is to cheat your investors. And in a competitive world, you don't have much wiggle room here.

If you would like to believe in business ethics, the unhappy theory is a huge problem.

As the world gets more complex, as it's harder to see the long-term given the huge short-term bets that are made, as business gets less transparent ("which company made that, exactly?") and as the web of interactions makes it harder for any one person to stand up and take responsibility, the happy theory begins to fall apart. After all, if the long-term effects of a decision today can't possibly have any impact on the profit of this project (which will end in six weeks), then it's difficult to argue that maximizing profit and doing the right thing are aligned. The local store gets very little long-term profit for its good behavior if it goes out of business before the long-term arrives.

It comes down to this: only people can have ethics. Ethics, as in, doing the right thing for the community even though it might not benefit you or your company financially. Pointing to the numbers (or to the boss) is an easy refuge for someone who would like to duck the issue, but the fork in the road is really clear. You either do work you are proud of, or you work to make the maximum amount of money. (It would be nice if those overlapped every time, but they rarely do).

"I just work here" is the worst sort of ethical excuse. I'd rather work with a company filled with ethical people than try to find a company that's ethical. In fact, companies we think of as ethical got that way because ethical people made it so.

I worry that we absolve ourselves of responsibility when we talk about business ethics and corporate social responsibility. Corporations are collections of people, and we ought to insist that those people (that would be us) do the right thing. Business is too powerful for us to leave our humanity at the door of the office. It's not business, it's personal.

[I learned this lesson from my Dad. Every single day he leads by example, building a career and a company based on taking personal responsibility, not on blaming the heartless, profit-focused system.]

Thomas Wailgum, an editor at CIO.com, summed up the enterprise software industry best when he wrote, “It might appear that even tobacco companies enjoy a better level of overall ‘likeability’ than do enterprise software vendors.”

The way successful enterprise software companies have historically operated has been more or less uncontested: licensing costs increase at regular intervals, technology is difficult to integrate, and the user experience is often atrocious. Unlike most other open markets, which force out negative behaviors over time, many of the practices in place today serve the vendor and customer asymmetrically. Amazingly, more than 40% of IT projects still fail to deliver the expected business ROI, yet enterprise vendors come out winning regardless.

But not for long. Now that enterprise software can be delivered over the web and iterated quickly, we’re seeing the barriers for development, distribution and adoption shrink to levels previously only witnessed by consumer internet companies, with millions of users on top of platforms like Yammer, Box, and Zendesk; these changes are creating a much more competitive landscape where the customer stands to gain tremendously. The values that now separate legacy vendors from a new breed of companies are not only technological, but also cultural and organizational. In short, building better enterprise technology requires that we build fundamentally different enterprise technology companies.

Creating amazing products, not amazing RFP responses

Enterprise software vendors have long enjoyed a counterintuitive, but highly lucrative, reward system. Its buyers are different from the ultimate users, and each group’s needs are radically different — traditionally, enterprise technology has been designed with the sale to the CIO in mind, and this produces solutions that are inevitably feature-bloated to “satisfy” the vast majority of a customer’s requirements.

This has created an oddly perverse dynamic where the vendors with the most feature-rich solutions win the contracts, but the users lose due to the complexity of the technology. And thanks to the incredibly long gaps between product releases, vendors are further motivated to cram as many features as possible into each version, hoping to check all the boxes on RFPs for the next few years.

So how do new entrants avoid this cycle all together? By focusing on building enterprise software that the users love, driving demand up to the CIO. Vendors like Workday, Jive, Yammer, or Rypple are responding by investing more in design, usability, openness, and the total user experience. They’re measuring success by user adoption, rather than feature checklists. And thankfully, buyers are catching on.

At Box, we now see RFPs where “user adoption” is a heavily weighted factor in the purchasing decision; this was virtually unheard of a few years ago. IT managers are realizing that there are better, more strategic uses of their time than training employees, fighting low adoption, and contending with angry users – they want technology that just works. And because of this, we’re seeing more alignment between users and the CIO than ever before.

Maintaining a hacker-centric engineering culture

Paul Graham wrote a great essay last year on the need for hacker-centric cultures, where he ostensibly attributed Yahoo’s decline to their failure to build an engineering-driven organization. Enterprise software companies are uniquely vulnerable to the tendency of losing their edge in this way. For many enterprise software startups, survival mode kicks in and the market forces them to trade their product vision for more immediate, realistic revenue opportunities. But roadmaps driven by the goal of winning bake-offs or a few exceptional clients are the quickest way to kill the engineering spirit in your organization and turn away strong talent.

Today, the size and scope of the markets that even the tiniest enterprise startup can go after, and the amount of data and tools at their fingertips, are unprecedented. And because new software entrants are moving at web-speed, the challenges and rewards of building for the enterprise are drawing a new crop of developers. We speak with prospective engineers that hold the latest group of enterprise software startups, like Asana or PBworks, in the same regard as Facebook or Zynga because the ethos are now remarkably similar (minus the farm animals).

When business applications are delivered over the web, releases often occur on a weekly (or daily) basis – far from the standard three year cycle experienced by those working for Microsoft and most incumbent enterprise software companies. Engineers get to see their projects come to life immediately, and the organization benefits from instant product feedback.

Try performing A/B tests on a Siebel system or Lotus 10 to 15 years ago, or pulling customer activity in real-time to drive product decisions. It simply wasn’t possible. Or, just imagine what enterprise software would look like if all enterprise vendors implemented Google’s 20% time, or quarterly hackathons?.

Building radically different enterprise sales

The new approach to building and delivering enterprise software also entails a very different sales process. With web-delivered, freemium or open source solutions, we’re seeing viral, bottom-up adoption of technology across organizations of all sizes. And while the ultimate buyer remains the same (as Ben Horowitz has pointed out), the chief adopters of technology are now the individuals within an organization looking for quick, easy ways to solve their most pressing business problems. With the freemium model in particular, software companies now have an incredibly scalable and qualified lead generation vehicle; your sales team doesn’t have to bang on the doors of unsuspecting and uninterested buyers, because your prospects are already familiar, and likely successful, with your product.

This is also changing enterprise software buying patterns. Enterprises are tired of six to twelve month sales cycles that leave them with a solution that ultimately fails to gain traction. They’re beginning to focus on working with technology that their employees are already using or familiar with. This model forces the sales organization to stay honest, as customers generally have to be “bought” into the product before they’ve technically paid anything.

Consequently, enterprise sales tactics and techniques reminiscent of Alec Baldwin in Glengarry Glen Ross are becoming as quaint as the mainframe. The sales organization isn’t going anywhere, it’s just focused on ensuring that customers are blown away by its products; and the focus is on building a department that is knowledgeable, consultative and friendly, focused on helping the customer navigate from being an early adopter to large scale

Taking responsibility for customer success and support

Finally, the enterprise software industry has become too wedded to a model where the success of the vendor is disconnected from customer success. Traditionally, as soon as an enterprise software sale is made, it becomes the buyer’s responsibility to support the purchase – often requiring the manpower of a 6 and 7-figure consulting engagement. For instance, Microsoft touts that nearly 80% of SharePoint deployments involve a partner in some capacity, and there’s a 6:1 ratio of dollars spent on services to the cost of the original licenses. While that’s great for the partner ecosystem, it means customers have no predictability in what they’ll ultimately be paying.

This too is changing. With the new wave of enterprise software companies, customers are no longer solely financially responsible for the victorious implementation of their purchased solutions. The unstoppable trend toward “renting” vs. “buying” software, means the vendor gets paid only as the software continues to solve problems for its customer. As forcing functions go, this is a pretty good one to ensure customers are happy — and it means implementation services, constant feedback loops, and deep customer engagement are all critical to successful retention.

And while we’re at it, customers should no longer have to pay dearly for vendor support. What if every enterprise technology company demonstrated a Zappos-like devotion to customer satisfaction? We’re already seeing this today with Rackspace eeking out extra margin with their fanatical support mantra. In the next generation enterprise software company, the customer support and services organizations are more important than ever before – committed to the success of customers throughout the entire life of product ownership.

The new rules of enterprise software are about delivering substantially better products and services, and aligning customers with buyers in unprecedented ways. We’ve already seen how quickly new solutions that are customer-focused can emerge within big and small businesses alike: Salesforce.com built an $20B market-cap company in a little over a decade with incredible customer success and satisfaction. The emergence of new enterprise platforms, and the amount of investment in and demand for these new tools, are going to dramatically change the competitive landscape for software providers. Startups, and even larger companies, that play by the new rules and understand the change taking place, will succeed. Ultimately, though, it’s customers that are the biggest winners, and my god has it taken a while for customers to win when it comes to their IT purchases.

Suddenly, Facebook Shuts Down Apps Left And Right

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Facebook has started shutting down apps with tens of thousands of active users left and right, AllFacebook writes.

The reason is Facebook didn't really police these "small" apps before and now has rolled out an algorithm that automatically shuts them down if they post too often to users' walls, etc. The problem is that Facebook didn't tell app makers it was going to do this, so these just woke up Friday and saw their app had been shut down, and very understandably freaked out.

This isn't too big a deal -- most app makers will simply tweak their app to get them back in compliance and move on -- but it shows how miscommunication can turn a routine adjustement into a big freakout.

Summary

Facebook is one of the largest websites in the world, with more than 500 million monthly users. The site was started in 2004 by founder and CEO Mark Zuckerberg when he was an undergraduate student at Harvard. Since September... More »

thats how they always do it,they make and break the rules, promise you everything then! SURPRISE ! thers been a change in our program weve made new rules, i hate to be done that way, and its alwats the big companys ,you think you can trust the most.They think they are so big and invinceable that they can make up the rules as they go along, because we can' thats there attitude!'

i would regulate facebook before i regulated google. facebook is much more the real monopoly. there are no other competitors at all. ONLY FACEBOOK. even google has competition. facebook is abusing that monopoly power all over the place. Disqus will soon shut down due to facebook.

This post is not correct - People who want to play by Facebooks rules and comply would have gotten notice to comply along with emails. I got several notices and I even got a an email regarding changes that apps were going to be required to make some changes and I am not an app developer so I didn't pay attention. , I just subscribed to the Developers platform notification service to keep a heads up with what is coming down the pipe and Facebook let those who asked to stay abreast of it all know it was coming.